SECTION 1

SUBSECTION 1. Application of Payments (Art. 1252-1254)

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 one and the same creditor. (Art. 1252,
par. 1)

ARTICLE 1252

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 yet 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.

There are four requirements before the right of application of payments may be exercised, to with:

(1) One debtor and one creditor;

(2) Several debts;

(3) Debts are of the saine kind; and

(4) Debts are all due, except when the parties stipulate or that the application is made by the party with
benefit of the term.

The application of payment should be made at the time of payment and not afterwards.

EXAMPLE:

A owed B the following amounts:

• P1,000 due on January 1, 2020;

• P1,000 due on February 1, 2020 and

• P1,000 due on March 1, 2020.

If on March 2, 2020 A went to B and paid P1,000, A could ask B to apply the amount paid to any of the
three obligations already due.

The reason of the law is to give the debtor the right or freedom to choose which of the obligations he
wants to settle first.

Supposing A paid the amount of P1,000 to B on February 28, could the amount paid be applied to the
debt falling due March 1, 2020? No. Because it was not yet due. However, if A andB had agreed that any
payment could be applied even to debts not yet due at the time of payment, then the payment on
February 28, 2020 could be applied to satisfy the debt due on March 1, 2020.

ARTICLE 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 payment must be applied first to the interest and whatever balance is left, must be credited to the
principal.

EXAMPLE:

Sikat owes Feria P1,000 payable within one year at ten per cent (10%) interest. On the maturity date of
Sikat's obligation, Sikat must pay Feria P1,000 as principal and also P100 corresponding to the interest at
10% a year. Suppose Sikat, instead of paying Feria P1,100.00, pays

only P1,000. How should this amount paid be applied?

Firstly, the interest of P100 must be paid. Then the balance of P900 should be applied to the principal.
Sikat, therefore, will still be indebted to Feria for the balance of the principal in the amount of P100.
 ARTICLE 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.

EXAMPLE:

A was indebted to B in the following amounts:

• P1,000 due on April 1, 1990 with 8% interest;

• P1,000 due on May 1, 1990, with 10% interest;

• P1,000 due on June 1, 1990 with 12% interest.

If on June 3, 2020, A paid B P1,000 without indicating to which of the three debts it was to be applied
then the amount paid should be applied to the third indebtedness due June 1, 2020 because it bears the
highest interest and as such it is the most onerous of the three obligations.

EXAMPLES OF ONEROUS DEBTS

(a) An exclusive debt which is not solidary is more onerous than a solidary debt;

(b) Older debts in case of running accounts;

(c) Debts with interest even if the non-interest bearing debt is older;

(d) Debts with penalty;

(e) Debts secured by mortgage or by pledge

(f) Advances for subsistence are more onerous than cash advances.
SECTION 4. CONFUSION OR MERGER OF RIGHTS

(Article 1275- Article 1277)

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

ARTICLE 1275

The obligation is extinguished from the time the characters of creditor and debtor

are merged in the same person.

BASIS FOR CONFUSION OR MERGER

If one who is a debtor is his own creditor, enforcement of the obligation becomes absurd, since one
cannot claim payment against himself. Hence, the obligation is extinguished.

REQUISITES OF CONFUSION OR MERGER OF RIGHTS

In order that confusion may take place resulting in the extinguishment of the obligation. The following
requisites must concur:

(1) That the characters of creditor and debtor must be in the same person;

(2) That it must take place in the person of either the principal creditor or the principal debtor;

(3) That it must be complete and definite.

EXAMPLE:

Boy Agila is indebted to Boy Negro in the amount of P5,000.00 pesos for which debt Boy Agila issued
promissory note in favor of Boy Negro. Boy Negro negotiates the promissory; later it is indorsed in favor
of Boy Agila. In this case, the obligation to pay the promissory note is extinguished inasmuch as Boy
Agila, being the maker of the note, is the debtor of the same, and by reason of its endorsement to him,
he has become the creditor of the said note. The characters of creditor and debtor with respect to the
same obligation are now merged in Boy Agila with the result that the debt is extinguished.
 ARTICLE 1276

Merger which takes place in the person of the principal debtor or creditor benefits the guarantors.
Confusion which takes place in the person of any of the latter does not extinguish the obligation.

• Merger- It is the meeting of one person of the qualities of creditor and debtor with respect to the
same obligation.

• Guarantor- is a person or an organization that promises to pay a debt owed by a second person, if the
latter fails to repay it.

EFFECT OF MERGER IN THE PERSON OF PRINCIPAL DEBTOR OR CREDITOR

Merger in the person of the principal debtor or creditor extinguishes the obligation.

Hence, the accessory obligation of guaranty is also extinguished in accordance with the principle that
the accessory follows the principal.

EXAMPLE:

D is indebted to C with G as guarantor. The merger of the characters of debtor and creditor in D shall
free G from liability as guarantor.

Similarly, merger which takes place in the person of C benefits G because the extinction of the principal
obligation carries with it that of the accessory obligation of guaranty.

EFFECT OF MERGER IN THE PERSON OF GUARANTOR

The extinguishment of the accessory obligation does not carry with it that of the principal obligation.

Consequently, merger which takes place in the person of the guarantor, while it extinguishes the
guaranty, leaves the principal obligation in force.

EXAMPLE:

Suppose, in the example above, C assigns his credit to X, who, in turn, assigns the credit to G, the
guarantor. In this case, the contract of guaranty is extinguished. However, D’s obligation to pay the
principal obligation subsists. G now, as the new creditor, can demand payment from D.
 ARTICLE 1277

Confusion does not extinguish a joint obligation except as regards the share corresponding to the
creditor or debtor in whom the two characters concur.

CONFUSION IN A JOINT OBLIGATION

In a joint obligation, there are as many debts as there are debtors and as many credits as there are
creditors, the debts and/or credits being considered distinct and separate from one another.

Each debtor has his own creditor to whom he is liable and confusion taking place in the person of any
debtor or creditor does not affect the others.

In other words, the confusion will extinguish only the share corresponding to the creditor or debtor in
whom the two characters concur.

EXAMPLE:

A, B, and C are jointly liable to D in the amount of P9,000.00 evidenced by a negotiable promissory note.
D endorsed the note to E, who, in turn endorsed it to A.

In this case, A’s share in the obligation is extinguished because of confusion in his person. However, the
indebtedness of B and C in the amount of P3,000.00 each remains because as to them there is no
confusion.

Consequently, B and C would be liable to A, the new creditor, P3,000.00 each.

CONFUSION IN A SOLIDARY OBLIGATION

Merger in the person of one of the solidary debtors shall extinguish the entire obligation because it is
also a merger in the other solidary debtors.

In a solidary obligation there is only one obligation and every debtor is individually responsible for the
payment of the whole obligation.

He who makes payment may claim reimbursement from his codebtors for the shares which correspond
to them. (Art. 1217, par. 2.)
EXAMPLE:

In the example given (from confusion in a joint obligation), if the obligation of A, B, and C is solidary, the
endorsement to A extinguishes the entire obligation of P9,000.00.

A can demand reimbursement from B and C. Here, the basis of the right of A is not the original
obligation which has been extinguished by the confusion which takes place in his person but the
confusion itself.

It is as if A paid the entire debt. He can, therefore, collect the proportionate shares belonging to B and
C on an implied contract of reimbursement.