Extinguishment of Obligations

Notes from: De Leon, Hector S., and Hector M. De Leon. The Law on Obligations and
Contracts. Rex Book Store, 2014.

Obligations are extinguished by:

● Payment or performance
● Loss of the thing due
● Condonation or remission of the debt
● Confusion or merger of the rights of creditor and debtor
● Compensation
● Novation
NOTE: Each of the above will be discussed below

Other causes of extinguishment of obligations:

● Annulment
● Rescission
● Fulfillment of a resolutory condition
● Prescription
● Death of party in case of an obligation requiring personal service
● Mutual desistance or withdrawal
● Arrival of resolutory period
● Compromise
● Impossibility of fulfillment
● Happening of a fortuitous event
NOTE: The above will not be discussed but I do encourage you to inquire on these modes of
extinguishment on your own.

PAYMENT OR PERFORMANCE

● As a legal term, “payment” includes delivery of money, giving of a thing, doing an act
or not doing an act.
● In law, payment and performance are synonymous
● As a general rule, partial or irregular performance will not extinguish an obligation.

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

Recovery allowed in case of substantial performance in good faith

● Requisites:
○ Substantial performance
○ Debtor is in good faith

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 ● Debtor can recover as if there had been a strict and complete fulfillment less
damages suffered by the creditor.
● Example:
○ S to deliver 500 bags of cement to B.
○ Despite diligent efforts S delivered only 200 bags. There was a cement
shortage.
○ Can S insist on payment for 200 bags? No. Not substantial performance.
○ What if S delivers 400 bags? Yes. S can compel B to pay the 400 bags based
on substantial compliance in good faith.

Recovery allowed when incomplete or irregular performance is waived

● Requisites:
○ Creditor knows it is incomplete or irregular
○ He accepts performance without protest or objection
● Example:
○ X agreed to paint the house of Y using Boysen paint.
○ Can Y refuse the house if X used Davies paint? Yes. Irregular performance.
○ Can Y accept the house if X used Davies paint? Yes. If Y accepted the
performance of X, the obligation is deemed complied with. The performance
is considered complete and regular.
○ Important lesson: Immediately object if performance is incomplete or irregular

Persons from whom the creditor must accept payment

● The debtor
● Any person who has interest in the obligation (like a guarantor)
● A third person if there is a stipulation

Free disposal of thing due and capacity to alienate required

● If the debtor does not have free disposal of thing due or does not have capacity to
alienate, the thing paid can be recovered
● Example:
○ S agreed to sell to B a television set which belongs to C.
○ C can recover the television set.

Person to whom payment shall be made

● the creditor
● his successor in interest
● any person authorized to receive it
● Example
○ D owes C P1,000.
○ If C dies, can C’s son collect the money from D? Yes. C’s son is a successor
in interest.

The very prestation due must be complied with

● Obligations to give: Debtor cannot compel creditor to receive a different one
(although equal in value or more valuable)

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 ● Obligations to do, not do: Act cannot be substituted against creditor’s will.
● Example
○ I offer to give you a brand new Toyota Vios
○ Instead, I give you a brand new Toyota Camry which is of higher value.
○ Should you accept? You can accept if you want to.
○ Can you refuse? Yes. Debtor cannot compel creditor to receive a different
one.

Performance of obligation should be complete

● Creditor cannot be compelled to accept partial payment or performance
● Debtor cannot be compelled to make partial payment or performance

When prestation may be substituted

If the creditor consents

Special forms of payment

● Dation in payment (dation en pago)
● Application of payment
● Payment by cession
● Tender of payment and consignation

Meaning of dation in payment

● The conveyance of ownership of a thing as an accepted equivalent of performance.
● Governing law: Sales
● It is a kind of novation
● Example
○ D owes C P30,000. To fulfill the obligation, D with the consent of C, delivers a
piano
○ If the piano is worth less than P30,000 the debt is extinguished to the extent
of the value agreed upon
○ If the piano is worth less than P30,000 but parties agreed, this is considered
as full payment then the obligation is cancelled

Payment by means of instruments of credits

● Examples on instruments of credit: promissory notes, checks (bank or manager’s
check), bills of exchange, other commercial documents
● These are not legal tender
● Creditor can refuse or accept. If there was a prior agreement that payment can be
made with instruments of credits, then this should be followed.
● Payment by instruments of credit does not extinguish obligations until:
○ They have been encashed
○ They have been impaired through the fault of the creditor
● Acceptance does not yet effect payment
● Mere conditional payment
● There is payment after creditors encashes the instrument
● Example

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 ○ D owes C P10,000 which is due today
○ Can D pay in check? Yes.
○ Can C refuse the check? Yes. Especially if there was no prior agreement.
○ If C accepts check, when is there payment? Only after the instrument is
encashed.

Place where obligation shall be paid

● If there is a stipulation, then payment is at the place designated
● If there is no stipulation, thing to be delivered is a specific thing, then payment is at
the place where thing was at the time the obligation was made
● If there is no stipulation, thing is generic, then payment is at the place of domicile of
debtor
● Order is successive and exclusive
● Example
○ S to deliver to B a specific refrigerator.
○ Parties agreed that delivery is at B’s house where the refrigerator is located.
○ What happens if no agreement? Payment is at the place where thing was at
the time the obligation was made.
○ What happens if no agreement, and what is to delivered is generic, and no
place agreed upon? B must go to the house of S to receive payment.

Meaning of application of payments

● 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 one and the same creditor
● This covers a situation where one person keeps on borrowing money from the same
person so there will be multiple debts to one creditor. If the debtor pays, then
sometimes the creditor gets confused as to which debt is being paid because there
are so many debts. The rules on application of payments clarifies for us, which debt
should be paid first.
● Here’s another scenario covered by application of payments:
● On Monday, Ben borrowed P1,500 from Gen to be paid on Friday. If not paid, Ben will
dance in public
● On Wednesday, Ben borrowed P1,500 from Gen to be paid on Friday. If not paid,
Ben will sing in public
● On Friday, Ben only paid P1,500. This means Ben only paid 1 debt and the other
debt is unpaid. Which one did he pay? Should Ben dance or sing? See the “Rules on
application of payments” below.

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
● Debts must be due
● Payment is not sufficient to cover all the debts

Rules on application of payments

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 ● Debtor has first choice. He must indicate at the time of making payment. Once
exercised, it is irrevocable
● If debtor does not apply payment, then creditor can make designation by specifying
in the receipt (with the consent of the debtor)
● If creditor does not make designation, then the debt most onerous shall be satisfied
● If debts are of the same burden, then the payment shall be applied to all of them
proportionately.

Meaning of cession
It is the assignment or abandonment of all the properties of the debtor for the benefit of his
creditors in order that the latter may sell the same and apply the proceeds thereof for the
satisfaction of their credits.

Effect of payment by cession

● The assignment to the creditors does not make the creditors the owners of the
property of the debtor
● The debtor is released up to the net proceeds of the sale of the property assigned
and the debtor is still liable for the balance

Dation Cession

Usually 1 creditor Several creditors

Debtor not insolvent Debtor insolvent
Does not involve all the property of debtor Involves all the property of the debtor
Creditor becomes owner of property given Creditors only get the right to sell the
by debtor properties of the debtor
Act of novation Not an act of novation

What would you do if you are a debtor and the creditor does not want to accept your
payment?
We cannot force a creditor to accept our payment but we can’t be at the mercy of our
creditor’s whims. In this situation, there is a process called tender and consignation wherein
we get to “pay” our creditor by giving our payment to a court. This “payment” will result to the
extinguishment of the obligation.

Meaning of tender of payment and consignation

● Tender of payment – act of debtor to offer to the creditor the thing or amount due.
● Consignation – 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.

Requisites of valid consignation

● valid debt is due

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 ● tender of payment by debtor and refusal without justifiable reason by the creditor to
accept it
● previous notice of consignation to interested parties
● consignation of the thing or sum
● subsequent notice of consignation to interested parties
● Example
○ D owes C P5,000.
○ D tenders payment but C unreasonably refuses payment.
○ Is the obligation extinguished when D offered to pay P5,000?

When tender of payment not required

● When the creditor is absent or unknown, or does not appear at the place of payment;
● When he is incapacitated to receive the payment at the time it is due;
● When, without just cause, he refuses to give a receipt;
● When two or more persons claim the same right to collect;
● When the title of the obligation has been lost.
● If creditor informs debtor that payment will not be accepted on the date when
payment is due. In such a case, debtor is excused from tender of payment on such
date (Kapisanan Banahaw vs. Dejarme and Alvermo)

Can you perform consignation by depositing payment in the bank account of the creditor?
No.
How about leaving it with their spouse? No.
Consignation must be with proper judicial authority (through the courts).

When consignation deemed properly made

● When the creditor accepts the thing or amount consigned/deposited, without
objection, as payment of the obligation
● When the creditor questions the validity of the consignation, and the court declares
that it has been properly made
● When the creditor does nothing and the court orders the cancellation of the obligation
● All of the above extinguished the obligation of the debtor

LOSS OF THE THING DUE

When loss of thing will extinguish an obligation to give

Requisites:
1. Deliver a specific or determinate thing
2. Without the fault of the debtor; and
3. Not guilty of delay

When loss of thing will not extinguish liability

1. When the law so provides.
2. Stipulation between parties. Ex. Parties specify in the contract that loss of the thing to be
delivered will not extinguish liability of the parties.

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3. Nature of the obligation requires assumption of risk. Ex. The role of insurance companies
is to compensate us in case of loss. For example, I take out an insurance policy against
earthquakes for my house. If an earthquake completely destroys my house, the insurance
company will compensate me. They cannot claim that they are not liable to compensate me
due to loss of the thing because at the time they issued the insurance policy, they assumed
the risk.
4. Arises from a crime. Ex. I steal your car and I get caught. If I lose the car due to a flood, I
cannot claim that loss of the thing because this obligation (to give you the car) arises from a
crime.

Effect of loss of a generic thing

Debtor is still liable even for loss due to fortuitous event

Effect of partial loss of a thing

● Courts will decide whether the partial loss is important as to extinguish the obligation
● Example
○ S obliged to deliver a horse to B to be used as a race horse
○ Horse permanently breaks leg
○ Will this injury extinguish the obligation?
○ Partial loss is so important as to extinguish the obligation

Art. 1265. Whenever the thing is lost in the possession of the debtor, it shall be presumed
that the loss was due to his fault, unless there is proof to the contrary, and without
prejudice to the provisions of article 1165. This presumption does not apply in case of
earthquake, flood, storm, or other natural calamity. (1183a)

Example
● D borrowed the car of C. Car was stolen.
● Is D liable for the loss of the car?
● Yes, because loss was presumed to be his fault. This is only a presumption. D can
show that he is innocent and not at fault.
● What if the car was lost due to flood? Is there a presumption that D is at fault?
● D is not presumed to be at fault because this was a natural calamity.

Art. 1266. The debtor in obligations to do shall also be released when the prestation
becomes legally or physically impossible without the fault of the obligor.
If impossible from the very beginning, the obligation is void.

Effect of impossibility of performance

Example
● D agreed to paint a portrait of C. D lost his arms
● D agreed to construct a commercial building. The city denied application for building
permit because the area is residential
● D agreed to appear as counsel for C but was later on appointed as judge.

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 Art. 1267. When the service has become so difficult as to be manifestly beyond the
contemplation of the parties, the obligor may also be released therefrom, in whole or in
part.

Effect of difficulty of performance

Example
D agreed to construct a road near a mountain. There was an avalanche which made it
difficult to construct the road. D may be released in whole or in part from his obligation

Art. 1269. The obligation having been extinguished by the loss of the thing, the creditor
shall have all the rights of action which the debtor may have against third persons by
reason of the loss.
Creditor is given the right to proceed against the third person responsible for the loss.

What if the thing lost is due to the fault of a third party? Can the creditor run after the
third party?
● Example
○ S is obliged to deliver a specific horse to B. The horse is lost because of T.
○ Is the obligation of S extinguished?
○ Obligation of S is extinguished.
○ Can B run after T who was at fault?
○ The law protects B by giving him a right of action against T to recover the
price of the horse with damages.

CONDONATION OR REMISSION OF THE DEBT

Meaning of condonation or remission

Condonation or remission is the gratuitous abandonment by the creditor of his right against
the debtor. It is thus a form of donation.

Requisites of condonation or remission

1. Gratuitous
2. Accepted by obligor
3. Capacity
4. Not inofficious
5. If made expressly, it must comply with the forms of donation

CONFUSION OR MERGER OF THE RIGHTS OF CREDITOR AND DEBTOR

Meaning of confusion or merger

Confusion or merger is the meeting in one person of the qualities of creditor and debtor with
respect to the same obligation.

Reason or basis for confusion

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1. If a debtor is his own creditor, then enforcement becomes absurd
2. Purposes for which the obligation may have been created are deemed realized.

Example
● D owes C P1,000 for which D executed a negotiable promissory note (PN) in favor of
C.
● C indorsed the PN to E
● E indorsed the PN to F
● F bought goods from the store of D.
● Can F indorse the PN to D? Yes
● What is the effect of indorsement of the PN to D? Confusion or merger of rights. Debt
is extinguished. Which makes sense because D is now botht the debtor (maker of the
PN) and the creditor (holder of the PN).

COMPENSATION

Meaning of compensation
● Compensation is the extinguishment to the concurrent amount of the debts of two
persons who, in their own right, are debtors and creditors of each other.
● My usual example for compensation is a barkada of three people, Ana, Bea and Con.
In the morning, Ana spent P300 to pay for everyone’s photocopying. In the afternoon,
Bea spent P300 for everyone’s merienda (snacks). In the evening, Con paid P300 for
the taxi when they went to a friend’s house. So every person owes someone
something. Let’s look at Ana. Ana paid P300 for photocopying so she can collect
P100 from Bea. But Bea paid for merienda so Bea can collect P100 from Ana.
Instead of paying each other, they could just agree to just “compensate” each other.
Filipinos would use the slang, “quits na tayo.”
● Here’s another example:
○ A owes B the amount of P1,000
○ B owes A the amount of P700
○ Both are due and payable today
○ Can there be compensation?
○ Partial compensation of P700. A still owes B P300

Requisites of legal compensation

1. Parties are principal creditors and principal debtors of each other
Example
● A owes B P1,000
● B owes A P1,000
● Can there be compensation? Yes. A and B 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
Example
● A owes B P10,000
● B owes A an electric range worth P10,000

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 ● Can there be compensation? No. One debt is in money and the other is not money.
3. The two debts are due or demandable
Example
● A owes B P1,000 due today
● B owes A P1,000 due next month
● Can there be compensation? No. One debt is not yet due
4. The two debts are liquidated
Example
● A owes B P1,000
● B owes A the share of the latter in a business the amount of which is still to be
ascertained
● Can there be compensation? No. because the debt of B is not yet liquidated
5. No retention or controversy commenced by a third person
Example
● A owes B P10,000
● B owes A P10,000
● B also owes C P10,000
● C garnishes the credit of B against A and notifies A not to pay B.
● Can there be compensation between A and B? No because of the controversy.

Consent of parties not required in legal compensation

● Compensation takes place automatically by mere operation of law – without need of
consent on the part of the parties, and even without their knowledge
● Full legal capacity of parties not required

NOVATION

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
○ substituting another in place of the debtor, or by subrogating a third person in
the rights of the creditor

Requisites of novation
1. previous valid obligation
2. capacity and intention of parties to modify or extinguish the obligation
3. modification or extinguishment of the obligation
4. creation of a new valid obligation

Can you presume novation?

No.

Novation is not presumed

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 ● There should be express agreement; or
● There should be acts of equivalent import; or
● There should be incompatibility of the 2 obligations with each other in every material
respect.

Kinds of personal novation

● Substitution – when the person of the debtor is substituted
● Subgrogation – when a third person is subrogated in the rights of a creditor

Kinds of substitution
1. Expromision
● third person’s initiative
● third person assumes the the debtor’s obligation
● without knowledge or against the will of the debtor
● with the consent of the creditor
● the old debtor is released from his obligation
2. Delegacion
● third person takes the place of the debtor
● instance of the debtor
● the creditor may withhold approval
● the old debtor, the new debtor and creditor must all agree

Can a third person replace a debtor without the consent of the creditor?
No

Consent of creditor necessary in novatoin

● Indispensable requirement
● Why? Waiver by the creditor of his credit and may be prejudicial to him
● Example
○ X and Y bought from S a parcel of land with an unpaid balance.
○ X transfers his interest in the property to Y
○ Can S still run after X?
○ Yes. X cannot avoid liability. Such transfer affects X and Y’s relationship but S
is not party to that agreement so he should not be affected.

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