RFBT
Law on Obligations | Extinguishment of Obligations
Mode of extinguishing an obligation:
Principal modes (PaLoCo3N)
1. Payment or performance;
2. Loss of the thing due;
3. Condonation or remission of debt;
4. Confusion or merger;
5. Compensation;
6. Novation (NCC, Art. 1231).
Other Modes (PARF)
7. Annulment;
8. Rescission;
9. Fulfillment of a resolutory condition;
10. Prescription (NCC, Art. 1231).
NOTE: The enumeration is not exclusive.
Other causes not expressly mentioned
(DAMCU)
11. Death – in obligations which are of purely
personal character;
12. Arrival of resolutory period;
13. Mutual dissent;
14. Change of civil status;
15. Happening of Unforeseen Event
PAYMENT OR PERFORMANCE
• PAYMENT OR PERFORMANCE - the delivery
of the sum or thing due or the performance of
the obligation in any other manner.
• Payment may consist not only in the delivery of
money but also the giving of a thing (other than
money), the doing of an act, or not doing of an
act (NCC, Art. 1232).
RULES IN MONETARY OBLIGATIONS:
1. Payment in cash - must be made in the
currency stipulated; if not possible, then in the
legal tender in the Philippines
2. Payment in check or other negotiable
instrument - not considered payment, they are
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not considered legal tender and may be refused by
the creditor
Exceptions: (extinguished unless ito)
a. When the document has been cashed
b. When it had been impaired through the fault of
the creditor
GR: creditor is not bound to accept payment
or performance by a third person.
EXCEPTIONS:
1. When made by a third person who has
interest in the fulfillment of the
obligation
2. Contrary stipulation
RIGHTS OF THE THIRD PARTY WHO PAID
THE OBLIGATION OF ANOTHER:
Note: Third person can perform the obligation as
long as there’s a consent from creditor.
1. Payment WITH the knowledge and consent
of the debtor
a. Can recover entire amount paid
b. Can be subrogated to all the right of the
creditor such as those arising from a
mortgage, guaranty or penalty
2. Payment WITHOUT the knowledge or
against the will of the debtor - can recover only
insofar as payment has been beneficial to the
debtor (can ask reimbursement up to the extent
the debtor has been benefited)
e.g. B is indebted to C in the amount of 10k. In
order to secure payment, B mortgaged his land.
Here come’s A and told C to pay B’s debt. A paid
C the 10k. (without consent of B) Extinguished?
Yes, through payment.
What is the right of A? A may only recover 10k
from B. A cannot subrogate the mortgage.
e.g. B is indebted to C in the amount of 10k. In
order to secure payment, B mortgaged his land.
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Here come’s A and told C to pay B’s debt. A paid
C the 10k. (with consent of B)
What is the right of A? A can recover 10k from B
and may ask C to subrogate B’s right over the
mortgage.
Can the debtor pay to a third person? Yes, as
long as the payment is beneficial to creditor.
GR: The debtor must pay to creditor.
e.g. A is indebted to B in the amount of 10k and B
is indebted C in the amount of 10k. (due and
demandable) A came to C instead of B to pay for
the debt.
Effect: A’s obligation to B is extinguished.
★ Payment to a person who is incapacitated to
administer his property shall be valid if he has
kept the thing delivered, or insofar as the payment
has been beneficial to him.
★ Payment made to a third person shall also be
valid insofar as it has redounded to the benefit of
the creditor.
★ When the obligation consists in the delivery of
an indeterminate or generic thing, whose quality
and circumstances have not been stated, the
creditor cannot demand a thing of superior quality.
Neither can the debtor deliver a thing of inferior
quality.
★ The payment of debts in money shall be made
in the currency stipulated, and if it is not
possible to deliver such currency, then in the
currency which is legal tender in the
Philippines.
• P1, P5, P10 coins-in amounts not exceeding
P1,000
• 25 centavo or less-in amounts not exceeding
P100
• Bills, regardless of denomination, are legal
tender up to whatever amount.
★ The delivery of promissory notes payable to
order, or bills of exchange or other mercantile
documents shall produce the effect of payment
only when they have been cashed, or when
through the fault of the creditor they have been
impaired.
RULE IN CASE OF EXTRAORDINARY
INFLATION OR DEFLATION
★ The value of the currency at the time of the
establishment of the obligation shall be the basis
of payment, unless there is an agreement to the
contrary. The law does not say it should be the
amount paid. However, there must be a declaration
of such extraordinary inflation or deflation by the
Banko Sental ng Pilipinas.
e.g. in 2005, A is indebted to B in the amount of 1k
to be paid in 2008. How much can B collect from
A? 1000 pesos.
IF, in 2005 extraordinary inflation, 1 sack = 100
pesos = 10 sacks of rice; but in 2008, 1 sack
equivalent to 200 pesos. How much can B collect
from A? 2000 pesos (10 sacks x 200)
PLACE OF PAYMENT
Payment shall be made in the place designated
in the obligation.
1. To deliver a specific thing: at the place where
the specific thing is located at the time of the
constitution of the obligation
2. Money or generic things: at the place of the
residence of the debtor
There being no express stipulation and if the
undertaking is to deliver a determinate thing, the
payment shall be made wherever the thing
might be at the moment the obligation was
constituted. In any other case the place of payment
shall be the domicile of the debtor.
*If the debt produces interest, payment of the
principal shall not be deemed to have been made
until the interests have been covered.
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 SPECIAL FORMS OF PAYMENT
*understand and MEMORIZE (TCPAD)
1. TENDER OF PAYMENT - is the
manifestation/act of the debtor to the creditor
of his decision to comply immediately with his
obligation.
2. CONSIGNATION - deposit of the object of
the obligation in a competent court in
accordance with the rules prescribed by law
after refusal or inability of the creditor to
accept the tender of payment.
GR: Tender of payment, even if valid, does not
by itself produce legal payment, unless it is
completed by consignation.
EXCEPTIONS (consignation alone extinguishes the
obligation in the 5 instances):
1. Creditor is absent or unknown or does not
appear at the place of payment
2. Creditor is incapacitated to receive payment at
the time it is due
3. When two or more persons claim the right to
collect
4. When the title to the obligation has been lost
5. When without just cause the creditor refuses to
give a receipt
★ Before the creditor has accepted the
consignation, or before a judicial declaration that
the consignation has been properly made, the
debtor may withdraw the thing or the sum
deposited, allowing the obligation to remain in
force.
★ If, the consignation having been made, the
creditor should authorize the debtor to withdraw
the same, he shall lose every preference which
he may have over the thing. The co-debtors,
guarantors and sureties shall be released.
e.g. A is indebted to B in the amount of 10k. But B
won’t accept the payment upon the tender. Hence,
A went to court for consignation.
If, prior consignation, B asks A to withdraw, in that
case obligation of A still remain.
If after consignation, B allowed A to withdraw, then
A withdraw, the obligation will be revived but A
loses the preference over the payment like
guarantee/surety/mortgage.
3. PAYMENT BY CESSION (CESSION EN
PAGO) - debtor abandons all of his
properties for the benefit of his creditors in
order that from the proceeds thereof, the
latter may obtain payment of their credits.
(debtor is insolvent)
★ partial extinguishment only, no transfer of
ownership
4. APPLICATION OF PAYMENT - designation
of the debt to which the payment must be
applied when the debtor has several
obligations of the same kind in favor of the
same creditor. (partial extinguishment)
Requisites:
1. One debtor and one creditor
2. Two or more debts of the same kind
3. All debts must be due
4. Amount paid by the debtor must not be
sufficient to cover all debts
e.g. A is indebted to B in the amount of 1k, 2k, and
500 with 1% interest per month. A only have 1k for
payment. In that case, apply the payment on
depending on the instruction of the debtor. In the
absence thereof, creditor will apply the payment to
the most onerous = 500 with interest. *kasi it will
continue to earn interest
*500 will be applied sa debt proportionately sa 1k (1/3), 2k (2/3) =
walang gumagawa sa reality
RULES:
1. The debtor has the first choice, he must indicate
at the time of making payment and not
afterwards, which particular debt is being paid.
The right once exercised is irrevocable unless
the creditor consents.
2. If the debtor does not apply payment, the
creditor may make the designation by
specifying in the receipt which debt is being
paid;
3. If the creditor has not also made the application,
the debt, which is most onerous to the debtor
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 among those due, shall be deemed to have LOSS OF THE THING DUE
been satisfied.
• LOSS OF THE THING DUE - a thing is
Which is more onerous: considered loss when it perishes, goes out of
1. Interest bearing debts are more onerous than commerce, or disappears in such a way that its
those which do not, even if the latter where existence is unknown or it cannot be recovered.
incurred at an earlier date
2. Between interest bearing debts, the debt with a EFFECT OF LOSS:
higher rate of interest is more onerous. 1. GR: In obligation to give determinate or
3. A secured debt is more onerous than that which specific things - will extinguish the obligation if
is not. the thing is lost. (NCC, Art. 1262).
EXCEPT:
5. DATION IN PAYMENT (DACION EN PAGO) a. When by law, obligor is liable even for fortuitous
- property alienated by the debtor to the event
creditor in satisfaction of the debt in money; b. When by stipulation, obligor is liable even for
the transmission of ownership of a thing by the fortuitous event
debtor to the creditor as an accepted equivalent c. When the nature of the obligation requires the
of performance of the obligation; governed by assumption of risk
the law on sales. (full extinguishment) d. When the loss of the thing is due partly to the
fault of the debtor
e. When the loss of the thing occurs after the debtor
Dation in Payment Payment by Cession
incurred in delay
1. One creditor 1. Plurality of
f. When the debtor promised to deliver the same
creditors
thing to two or more persons who do not have the
2. Not necessarily in 2. Debtor must be
state of financial partially or relatively same interests
difficulty insolvent g. When the debt of a certain and determinate
3. Thing delivered 3. Universality of thing proceeds from a criminal offense
which is considered as property of debtor h. When the obligation is to deliver a generic
equivalent or thing.
performance
2. GR: In obligation to give a generic thing-
4. Payment 4. Merely release
extinguishes debtor for net obligation is not extinguished, the genus of a
obligation to the proceeds of things thing cannot perish.
extent of the value ceded or assigned, EXCEPTION: in case of generic obligation whose
of the things unless there is object is a particular class or group with specific or
delivered as agreed contrary intention determinable qualities (limited generic
upon obligations)
5. Creditor becomes 5. Creditor does not
the owner of the become the owner of 3. In obligation to do - obligation is
property of the the property of the extinguished when the prestation becomes
debtor debtor. Possession is legally or physically impossible
only transmitted but
not ownership.
★ Whenever the thing is lost in the possession of
the debtor, it shall be presumed that the loss was
e.g. D is indebted to B in the amount of 1k. At the
due to his fault, unless there is proof to the
time of payment, D is not liquid. D told be na
contrary.
pambayad nalang is B is his personal phone. B
accepted. (dation in payment – pre-existing
★ The debtor in obligations to do shall also be
monetary obligation)
released when the prestation becomes legally or

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physically impossible without the fault of the e.g. M issued a promissory note to P. After some
obligor. time, na kay M. In that case may implied
condonation.
REMISSION OR CONDONATION
3. It is presumed that the accessory obligation of
• REMISSION OR CONDONATION - the pledge has been remitted when the thing
gratuitous abandonment by the creditor of his pledged, after its delivery to the creditor, is
right against the debtor. It is a form of found in the possession of the debtor, or of a
donation. third person who owns the thing.
• *it can be complete or partial (ex. wag mo na e.g. A umutang kay B. As a security, A pledge his
bayaran ang 1k, 500 nalang = full phone, if the phone is in the possession of A =
extinguishment) automatic condone na ung pledge =
extinguished. But PRINCIPAL, still remain.
REQUISITES OF REMISSION:
1. It must be gratuitous; *The renunciation of the principal debt shall
2. It must be accepted by the obligor; extinguish the accessory obligations; but the waiver
3. The obligation must be demandable; of the latter shall leave the former in force
4. Parties have the capacity;
5. Not inofficious; and CONFUSION OR MERGER
6. Must comply with the formalities of donation
• CONFUSION OR MERGER OF RIGHTS -
should it be express.
merger of the characteristics of the creditor
↓
and the debtor in one and the same person
DONATION ACCEPTANCE
★ Money or by virtue of which the obligation is
personal property extinguished.
ORAL ORAL
with value of • e.g. M issued a promissory note in favor of P,
P5,000 or LESS: P negotiated to A then A to B and B to M.
★ Money or
personal property
*Confusion does not extinguish a joint
with value of IN WRITING IN WRITING
MORE than obligation except as regards the share
P5,000 corresponding to the creditor or debtor in
★ Real property whom the two characters concur.
IN PUBLIC IN PUBLIC
regardless of the e.g. (joint) A, B, C issued a promissory note
INSTRUMENT INSTRUMENT
value:
indicated “we promised” in favor of D. D
negotiated it to E, then E to F, and F to A. Is the
Instances of Implied Condonation or
obligation extinguished? It depends.
Remission of Debt ★
As far as A is concerned, extinguished ung part
ni A. However, B and C are still liable to the
1. The delivery of a private document evidencing
obligation.
the credit made voluntarily by the creditor to the
debtor.
(solidary) same situation. “I promised to pay”
e.g. M issued a promissory note in favor of P then
As far as the creditors are concerned, all
P delivered voluntarily to M. Extinguished.
debtors’ obligation is extinguished.
However, it is as if si A ang nagbayad kay F.
2. Whenever the private document in which the
Extinguished but A can recover from B and C for
debt appears is found in the possession of the
their share.
debtor.

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 COMPENSATION
• COMPENSATION - extinguishment in the
concurrent amount of the obligation of those
persons who are reciprocally debtors and
creditors of each other.
• e.g. A is indebted to B in the amount of 10k at
the same time B is indebted to A in the same
amount. Instead of collecting, compensate =
quits na! can be total or partial* (*yung
remain is still payable)
KINDS:
1. Legal - when it takes effect by operation of law
from the moment all the requisites are present.
2. Voluntary - when the parties who are mutually
creditors and debtors agree to compensate their
respective obligations, even though all of the
requisites for legal compensation may not be
present.
3. Judicial - when it takes effect by judicial decree.
(ordered by the court)
4. Facultative – only one of parties has the right to
compensate (bailor, depositor, ward, victim)
REQUISITES OF LEGAL COMPENSATION:
1. Each one of the obligors be bound principally,
and that he be at the same time a principal
creditor of the other;
2. Both debts consist in a sum of money, or if the
things due are consumable, they be of the same
kind, and also of the same quality if the latter has
been stated;
3. The debts are due, liquidated, and
demandable;
4. That over neither of them there be any
retention or controversy, commenced by third
persons and communicated in due time to the
debtor; and
5. The compensation must not be prohibited by
the law.
EFFECT OF LEGAL COMPENSATION - When all
the requisites mentioned above are present,
compensation takes effect by operation of law, and
extinguishes both debts to the concurrent amount,
even though the creditors and debtors are not
aware of the compensation.
★ Obligation NOT COMPENSABLE: ★
1. Debts arising from contract of deposit (non -
consumable things: grocery store deposit counter)
e.g. A deposited his phone to B. Also, A is indebted
to B in the amount of 10k. B cannot ask A to have
the phone to compensate the debt of A of 10k.
Debtor only have the RIGHT to ask for
compensation.
2. Debts arising from contracts of commodatum.
(pinahiram)
3. Claims for support due by gratuitous title, but
the persons who is entitled to support can claim
compensation (facultative)
e.g. A is obliged to give support monthly to B in
the amount of 10k. But B has debt to A. A cannot
compensate the debt with his support but B can
set-up the compensation.
4. Obligations arising from criminal offense, but
the offended party can claim compensation
(facultative)
5. Certain obligations in favor of the government
*The parties may agree upon the compensation of
debts which are not yet due (voluntary
compensation).
*When one or both debts are rescissible or
voidable, they may be compensated against each
other before they are judicially rescinded or
avoided.
Facultative compensation is unilateral and does
not require mutual agreement; voluntary or
conventional compensation requires mutual
consent.
EFFECTS OF ASSIGNMENT ON
COMPENSATION OF DEBTS ★★
1. After the compensation took place
GR: Ineffectual; useless act since there is nothing
more to assign
XPN: When the assignment was made with the
consent of the debtor.
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NOTE: Such consent operates as a waiver of the
rights to compensation
XPN to the XPN: At the time he gave his consent,
he reserved his right to the compensation.
2. Before compensation took place
a. With the consent of the debtor –
Compensation cannot be set up except when the
right to compensation is reserved.
b. With the knowledge but without consent of
the debtor – Compensation can be set up
regarding debts previous to the cession or
assignment but not subsequent ones.
c. Without the knowledge of debtor - Can set
up compensation as a defense for all debts
maturing prior to his knowledge of the
assignment.
EXAMPLE:
A is indebted to B in the amount of 1k (DD: 06/01/21)
B is indebted to A in the amount of 2k (DD: 06/10/21)
A is indebted to B in the amount of 1k (DD: 06/12/21)
A on June 11, assigned his right over the 2k to C
without the knowledge of B. C will know collect the
2k from B. Can B can set-up a compensation on the
1k which is prior the assignment (June 1) and/or after
assignment (June 12)? YES, w/o consent; w/o
knowledge.
What if there’s a consent and knowledge? A told
B that he will assign to C. B agreed. Then C will
collect.
B cannot compensate to C. But has a right to
collect 1k from A.
Without consent; with knowledge. A told B that he
will assign to C. But B disagreed. B can set-up
compensation (prior 1k only but the latter 1k will
not be compensated)
Renunciation of compensation
Compensation can be renounced expressly or
impliedly. It can also be renounced either at the
time an obligation is contracted or afterwards. It
rests upon a potestative right, and a unilateral
declaration of the debtor would be sufficient
renunciation.
NOVATION
• NOVATION - substitution or change of an
obligation by another resulting in the
extinguishment or modification either by:
1. changing the object or principal condition
(real) (dacion en pago)
2. substituting another in place of debtor
(personal)
3. by subrogating a third person in the right
of the creditor (personal)
it can be mixed. (real + personal)
REQUISITES OF NOVATION:
1. Previous valid and existing obligation;
2. Capacity of the contracting parties;
3. Animus novandi or intent to novate;
4. Substantial difference between the old
obligation and new obligation,
consequently extinguishment of the old
obligation; and
5. Validity of the new obligation.
Two-fold purpose of novation:
1. Original obligation is extinguished; and
2. New obligation is created.
RULES:
1. Accessory obligations may subsist when the
principal obligation is extinguished in
consequence of a novation but only insofar as they
may benefit third persons who did not give their
consent.
2. If the new obligation is void, the original one
subsists, unless the parties intended that the
former relation should be extinguished in any
event.
3. If the original obligation is void, the novation is
void regardless of whether or not the new
obligation is valid or void.
4. When the original obligation was subject to a
suspensive or resolutory condition, the new
obligation shall be under the same condition,
unless it is otherwise stipulated.
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 TWO FORMS of substituting a new debtor in b. A third person not interested in the obligation
place of the original debtor pays with the express or tacit approval of the
debtor.
1. EXPROMISSION - substitution of the old debtor
by a third person without the knowledge or c. When even without the debtor's knowledge, a
against the will of the old debtor but the third person interested in the fulfillment of the
person acts on his own initiative to assume the obligation pays without prejudice to the effects
debtor's obligation with the consent of the of confusion as to the latter's share.
creditor. It is essential that the old debtor be 2. CONVENTIONAL - it requires the consent of the
released from his obligation. original parties and of the third person substituting
2. DELEGACION - substitution of the old debtor the original creditor.
when the creditor accepts a third person to take
the palace of the debtor at the instance of the Examples of Novation:
latter. The creditor may withhold approval. All A obliged himself to deliver B a Toyota car.
parties, the old debtor, the new debtor and the Subsequently, they agreed to deliver
creditor must agree. Mitsubushi car instead.
EXPROMISSION DELEGACION
reimbursement What happens to the original obligation?
he can recover from the Extinguished. (Expressed Real Novation)
only insofar as original debtor
the payment has of the entire A obliged himself to deliver B a Toyota car.
Rights of
the new been beneficial amount paid Subsequently, A agreed to deliver Mitsubishi car
debtor instead. Is this a novation? No. Because the old
to the debtor and
and new obligation can exist independently.
and no subrogation in
Hindi sila contradictory.
subrogation. all the rights of
the creditor.
Implied novation
the new debtor's A obliged himself to B to construct a school
Effect of insolvency shall building in the parcel of land owned by B.
no revival of
insolvency not revive the Subsequently, they agreed that instead of
the old
of the new original debtor's
obligation** constructing the school building, A shall
debtor: liability to the
construct an apartment in the same land. There
creditor.
is an implied novation because there’s an
** EXCEPT in the following instances:
incompatibility. They cannot exist
a. Insolvency already existed and of public independently.
knowledge at the time when the original debtor
delegated his debt.

b. Insolvency was already existing and known to

the original debtor when he delegated his debt.

KINDS OF SUBROGATION:

1. LEGAL - it is not presumed, except in the

following instances:

a. Creditor pays another creditor who is preferred

without debtor's knowledge.

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Principal + Accessory OLD NEW
Novation Valid Valid
A obliged himself to pay B in the amount of 10k
Valid
with 10% interest per month to be paid to C. No novation (not extinguished Void
They agreed to instead of A paying to B, A will unless stipulated)
deliver to B a phone. No novation Void Valid
subjected to
Extinguished ba ung interest? As a rule. Yes. the same
condition
Accessory follows the principal. Contains condition
(unless
(S/R)
otherwise
If such novation has no consent of C, A is still stipulated by
subject to the accessory contract. parties)
Not
If principal has automatically
A is indebted to B in the amount of 1M. To
accessory subject to
secure the payment of 1M, A mortgaged his
contracts accessory
land in favor of B. Here come’s C and told B that contract
C will pay for the debt without consent of A.
How much C can collect from A? 1M pesos.
Is it possible that the 1M will be subject to
mortgaged? No. C has only right to 1M but no
right to subrogate.

In the case of delegacion, if A went to B and

informed that C will pay instead. B agreed. Then
C paid 1M to B. Can C ask B to subrogate him
to his right over the mortgage? YES.
In short, A may utang kay C na 1M and 1M still
secured by the mortgage.

A is indebted to B in the amount of 10k to be

paid on June 01, 2021. Here comes C, told B on
March 30, 2021 that he will pay the debt of A,
without the consent of A. B agreed.
EXTINGUISHED.
At the time of payment, C is insolvent. Can B
revive the old debtor? NO.

Subrogation
A is indebted to B in the amount of 10k. Then C
paid the debt of A to B. C has the right to
reimburse the payment to A.
Substitution – before payment
Subrogration - after payment