INFORMATION SHEET LOC 123-5

Extinguishment of
Obligation

LEARNING OBJECTIVES:
After reading this INFORMATION SHEET, YOU MUST be able to:
1. Identify the laws behind the payment of obligation
2. Define novation and consignation

EXTINGUISHMENT OF OBLIGATION
GENERAL PROVISIONS

PAYMENT OR PERFORMANCE

ARTICLE. 1232: Payment means not only the

delivery of money but also the performance,
in any other manner, of an obligation.

‘Payment’ Defined

Payment is that mode of extinguishing

obligations which consists of:

(a) the delivery of money, or

(b) the performance in any other manner of
an obligation. (Example: rendition of the
required service).

Acceptance by Creditor

For payment to properly exist, the creditor has to accept the same, expressly or
implicitly. Payment, for valid reasons, may properly be rejected

ARTICLE. 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.

How Payment or Performance Is Made

If the debt is a monetary obligation, by delivery of the money. The amount paid
must be full, unless of course otherwise stipulated in the contract.

MEANS OF PROVING PAYMENT

One good proof is the presentation of the receipt.

APPLICATION OF PAYMENTS

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.

‘Application of Payments’ Defined

“It is the designation of the debt to which should be applied a payment made
by a debtor who owes several debts in favor of the same creditor.”. Stated
differently, it is the phrase applied to show which debt, out of two or more
debts owing the same creditor, is being paid.

Importance

It is important to know rules on application of payments because otherwise, we

may not know which one, of two or more debts, has been extinguished.

A owes B P1 million payable Apr. 1. A also owes B P1 million payable Apr. 5.

On Apr. 10, A pays B P1 million. Here, we will not know which debt has been
extinguished unless we know the rules on the application of payments.

Requisites for Application of Payment to Be Made Use of

(a) there must be two or more debts (severalty of debt);

(b) the debts must be of the same kind;
(c) the debts are owed by the same debtor in favor of the same creditor
(thus, there must be only one debtor and only one creditor);
(d) all the debts must be due (this includes a case when the benefit of the
terms is given to the person making the application), unless of course
the contrary has been stipulated);
(e) the payment is not enough to extinguish all the debts.

How Application of Payment Is Made

(a) The debtor makes the designation.

(b) If not, the creditor makes it, by so stating in the receipt that he issues,
“unless there is cause for invalidating the contract.”
(c) If neither the debtor nor the creditor has made the application, or if the
application is not valid, then application is made by operation of law.

Bachelor of Science in Bulacan Date Developed:

Accounting Information January 2021
Polytechnic Date Revised: Page __ of 69
Systems
College February 2021
Law on Obligations Developed by:
Document No. Ms. Rachael Louise De
and Contracts Revision No:0
LOC 123 Guzman, LPT
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.

Interest Must Be Paid First

The Article is obligatory, that is, the debtor cannot insist that his payment be
credited to the principal instead of the interest.

PAYMENT BY CESSION

ARTICLE. 1255. The debtor may cede or assign his property to his
creditors in payment of his 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.

Cession or Assignment in Favor of Creditors Defined

It is the process by which a debtor transfers all the properties not subject to
execution in favor of his creditors so that the latter may sell them, and thus
apply the proceeds to their credits.

Requisites for Voluntary Assignment

(a) more than one debt;

(b) more than one creditor;
(c) complete or partial insolvency of debtor;
(d) abandonment of all debtor’s property not exempt from execution (unless
exemption is validly waived by debtor) in favor of creditors;
(e) acceptance or consent on the part of the creditors

TENDER OF PAYMENT AND CONSIGNATION

‘Tender of Payment’ Defined

The act of offering the creditor what is due him together with a demand that
the creditor accept the same.
Soco v. Judge Militante GR 58961, Jun. 28, 1983
The objective of notice prior to consignation is to give the creditor a chance to
reconsider his refusal to accept payment. In this way, consignation and
litigation may be avoided. On the other hand, the purpose of notice after
consignation is to enable the creditor to withdraw the money or goods
deposited with the judicial authorities.
‘Consignation’ Defined

The act of depositing the thing due with the court or judicial authorities
whenever the creditor cannot accept or refuses to accept payment. It generally
requires a prior tender of payment.
Bachelor of Science in Bulacan Date Developed:
Accounting Information January 2021
Polytechnic Date Revised: Page __ of 69
Systems
College February 2021
Law on Obligations Developed by:
Document No. Ms. Rachael Louise De
and Contracts Revision No:0
LOC 123 Guzman, LPT
De Vera, et al. v. Republic, et al. L-32998, Jul. 12, 1973

If the lessor refuses to accept the payment of rentals, what the lessee should do
is to resort to judicial deposits of the corresponding amounts.

‘Tender of Payment’ Distinguished from ‘Consignation’

“The clear meaning of these words show their difference. TENDER is the
antecedent of CONSIGNATION, i.e., an act preparatory to the consignation,
which is the principal, and from which are derived the immediate
consequences which the debtor desires or seeks to obtain. TENDER of payment
may be extrajudicial, while CONSIGNATION is necessarily judicial, and the
priority of the fi rst is the attempt to make a private settlement before
proceeding to the solemnities of consignation.”

Effect of Tender Without Consignation

Tender of payment without consignation does not extinguish the debt;

consignation must follow.

LOSS OF THE THING DUE

What “Loss” Includes “

Loss” under this Section includes
“impossibility of performance.”

When Is There a Loss

(a) when the object perishes (physically, it
is destroyed)
(b) when it goes out of commerce
(c) when it disappears in such a way that
 its existence is unknown
 or it cannot be recovered

What Impossibility of Performance includes:

(a) physical impossibility

(b) legal impossibility, which is either:
 directly caused as when prohibited by law
 or indirectly caused as when the debtor is required to enter a
military draft
(c) moral impossibility (impracticability).

ARTICLE. 1262. An obligation which consists in the delivery of a

determinate thing shall be extinguished if it should be lost or destroyed
without the fault of the debtor, and before he has incurred in delay.

When by law or stipulation, the obligor is liable even for fortuitous events,
the loss of the thing does not extinguish the obligation, and he shall be
responsible for damages. The same rule applies when the nature of the
obligation requires the assumption of risk.
Bachelor of Science in Bulacan Date Developed:
Accounting Information January 2021
Polytechnic Date Revised: Page __ of 69
Systems
College February 2021
Law on Obligations Developed by:
Document No. Ms. Rachael Louise De
and Contracts Revision No:0
LOC 123 Guzman, LPT
Two Kinds of Obligations “To Give”
An obligation to give may consist of an obligation:
 to give a generic thing;
 or to give a specific thing.

Effect of Loss on an Obligation to Deliver a Specific Thing

(a) General rule — the obligation is extinguished. [ NOTE: The loss must be
after the obligation has been incurred, because if the loss had been
PRIOR, there would not be any subject matter and therefore there would
not have been any obligation at all.]

[NOTE: If the mortgaged property is lost, the mortgagor being the owner
of it bears the loss (res perit domino). He is, of course, still liable for the
debt, since this obligation is monetary, and therefore may be said to be
generic in character.

Exceptions: The obligation is not extinguished in the following cases:

1. if the debtor is at fault (Art. 1262, par. 1, Civil Code);
2. when the debtor is made liable for a fortuitous event because:
 of a provision of law;
 of a contractual stipulation;
 the nature of the obligation requires the assumption of risk
on the part of the debtor.

Examples of Instances When the Law Requires Liability Even in the Case
of a Fortuitous Event

a) when the debtor is in default (mora) (Art. 1165, Civil Code);

b) when the debtor has promised to deliver the same thing to two or more
persons (parties) who do not have the same interest (Art. 1165, Civil
Code);
c) when the obligation arises from a crime. (Art. 1268, Civil Code);
d) when a borrower (of an object) has lent the thing to another who is not a
member of his own household (Art. 1942[4], Civil Code);

ARTICLE. 1263. In an obligation to deliver a generic thing, the loss or

destruction of anything of the same kind does not extinguish the
obligation.

Effect of Loss on Obligation to Deliver a Generic Thing

The obligation continues to exist because a generic thing does not really perish
(genus nunquam perit — “genus never perishes”).

CONFUSION OR MERGER OF RIGHTS

Bachelor of Science in Bulacan Date Developed:

Accounting Information January 2021
Polytechnic Date Revised: Page __ of 69
Systems
College February 2021
Law on Obligations Developed by:
Document No. Ms. Rachael Louise De
and Contracts Revision No:0
LOC 123 Guzman, LPT
ARTICLE. 1275. The obligation is extinguished from the time the
characters of creditor and debtor are merged in the same person.

‘Merger or Confusion’ Defined

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

Requisites of a Valid Merger

a) It should take place between the principal debtor and creditor. Therefore,
confusion of the creditor with the person of the guarantor does not
extinguish the principal obligation. (Art. 1276). Of course, in a case like
this, the accessory obligation of guaranty is extinguished.

Therefore also, there can be no confusion or merger if the debtor and

creditor represent (different) juridical entities even if the officers of both
are the SAME.

b) The merger must be clear and definite.

c) The very obligation involved must be the same or identical (because if the
debtor acquires certain rights from the creditor with respect to other
things, there is no merger).

(NOTE: If an heir is a debtor of the deceased, merger does not necessarily

follow, for other creditors may be prejudiced.)

Example of Merger

A makes a check payable to bearer, and hands the check to C, who hands it
to D who finally hands it to A. Here A owes himself. This is a clear case of
merger, and hence the obligation of A is extinguished.

COMPENSATION

ARTICLE. 1278. Compensation shall take place when two persons, in

their own right, are creditors and debtors of each other.

‘Compensation’ Defined

“It is a sort of balancing (cum ponder — ‘to weigh together’) between two
obligations; it involves a figurative operation of weighing two obligations
simultaneously in order to extinguish them to the extent in which the
amount of one is covered by the other.”

‘Compensation’ Distinguished from ‘Payment’

a) While payment must be complete and indivisible as a rule, in

compensation, partial extinguishment is always permitted

Bachelor of Science in Bulacan Date Developed:

Accounting Information January 2021
Polytechnic Date Revised: Page __ of 69
Systems
College February 2021
Law on Obligations Developed by:
Document No. Ms. Rachael Louise De
and Contracts Revision No:0
LOC 123 Guzman, LPT
 b) While payment involves action or delivery, true compensation (legal
compensation) takes place by operation of law.

Kinds or Classes of Compensation

A. According to its effect or extent:

1. Total — if both obligations are completely extinguished because they are

of the same or equal amounts.
2. Partial — when a balance remains (hence, there is a partial
compensation in the larger of the two debts).

B. According to its origin or cause:

1. Legal — this takes place by operation of law, and need not be

pleaded.
2. Voluntary or conventional — this is due to the agreement of the
parties.

NOVATION

ARTICLE 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 right of the creditor

‘Novation’ Defined

“By novation is understood the substitution or change of an obligation by

another, which extinguishes or modifies the first, either changing its object or
principal condition, or substituting another in place of the debtor, or
subrogating a third person in the right of the creditor.” (8 Manresa 428).

The term “principal conditions” in Art. 1291 of the New Civil Code should be
construed to include a change in the period to comply with the obligation,
which change in the period would only be partial novation, since the period
merely affects the performance, not the creation of the obligation.

Bachelor of Science in Bulacan Date Developed:

Accounting Information January 2021
Polytechnic Date Revised: Page __ of 69
Systems
College February 2021
Law on Obligations Developed by:
Document No. Ms. Rachael Louise De
and Contracts Revision No:0
LOC 123 Guzman, LPT