LAW ON OBLIGATIONS – Midterm Coverage

EXTINGUISHMENT OF OBLIGATIONS.

1. Modes of Extinguishing Obligations.

• Payment or performance
• Loss of the thing due
• Condonation or remission of debt
• Confusion or merger of the rights of the creditor & debtor
• Compensation
• Novation (Art. 1231, NCC)

Other modes of extinguishing obligations:

• Renunciation Or waiver by the creditor
• Compromise
• Expiration of the resolutory term or period
• Will of one of the contracting parties in certain contracts
• Mutual assent or dissent

2. Payment or Performance, Concept.

Payment means not only the delivery of money but also the performance, in any other
manner, of an obligation.

3. How Payment Be Made.

a. There must be delivery of the thing or rendition of the service that was
contemplated.
1. The debtor of a thing cannot compel the creditor to accept a different one
although the latter may be of the same value as, or more valuable than that
which is due. (Art. 1244, NCC)
2. 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. (Art. 1244, NCC)
3. In obligations to give a 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 purpose of the
obligation and other circumstances shall be taken into consideration. (Art.
1246, NCC)
4. If the obligation is a monetary obligation, the payment must be in legal
tender.

LEGAL TENDER – is the money or currency which the debtor may compel
his creditor to accept in payment of his debt (whether public or private)

b. The payment or performance must be complete. The following are the exceptions:
1. If the obligation has been substantially performed in good faith, the obligor
may recover as though there had been strict and complete fulfillment, less
damages suffered by the oblige. (Art. 1234, NCC)
2. When the oblige accepts the performance knowing its incompleteness or
irregularity, and without expressing any protest or objection, the obligation
is deemed fully complied with. (Art. 1235, NCC)

4. When Partial Payments May Be Made.

The creditor cannot be compelled to receive, and the debtor cannot be compelled to make,
partial payments, except:
a. When there is an agreement to that effect.
 However, the payment must still be made in full at some future time in accordance
with the agreement, to extinguish the obligation.

b. When the debt is in part liquidated (i.e., the amount is fixed) and in part
unliquidated, the creditor may demand and the debtor may effect the payment of
the former without waiting for the liquidation of the latter. (Art. 1248, NCC)

The unliquidated part, once it is finally determined, must also be paid, to extinguish
the obligation.

5. Who Must Make The Payment.

Payment must be made by the debtor who must possess the following:
• The free disposal of the thing due
• The capacity to alienate the thing

6. Payment by a Third Person.

1. Creditor not bound to accept payment by a third person or performance by a third

person except in the following:
a. When there is a stipulation to that effect.
b. When the third person has an interest in the fulfillment of the obligation
such as a guarantor or a co-debtor. (Art. 1236, NCC)

2. Rights of a third person who makes the payment

a. Payment with knowledge and consent of the debtor
i. He can recover what he has paid (Art. 1236, NCC)
ii. He is entitled to be subrogated in the rights of the creditor such as
those arising from mortgage, guaranty or penalty. (Art. 1237, NCC)

b. Payment without the knowledge or against the will of the debtor

i. He can recover only insofar as the payment has been beneficial to
the debtor. He is not entitled to subrogation. (Arts. 1236 and 1237,
NCC)

3. Payment by a third person who does not want to be reimbursed

a. The payment shall be deemed to be a donation which requires the debtor’s
consent.
b. If the debtor does not consent, the payment shall nevertheless be valid to
the creditor who has accepted it. (Art. 1238, NCC).

In such a case, the third person can only recover insofar as the payment has
been beneficial to the debtor; he is also not entitled to subrogation. (Arts.
1236 and 1237)

7. To Whom Payment Be Made.

a. To the creditor (the person in whose favor the obligation has been constituted)
b. To the creditor’s successors in interest, such as his heir or assigns.
c. To any person authorized to receive payment

General Rule: As a rule, payment to an unauthorized third person is not valid.

Exceptions:
1. If the payment has redounded to the benefit of the creditor, which benefit
need not be proved in the following cases (Art. 1241, NCC):
i. If after the payment, the third person acquires the creditor’s rights
(such as when the third person becomes the assignee of the
instrument evidencing the credit).
ii. If the creditor ratifies the payment to the third person
iii. If by the creditor’s conduct, the debtor has been led to believe that
the third person had the authority to receive payment (such as when
 a water service company gives a collector’s uniform to a third person
who is not its employee and the debtor gives his payment to such
third person believing that he is the authorized collector).

2. If the payment is made in good faith to a third person in possession of the

credit. (Art. 1242, NCC)

In this case, the third person should be both in possession of the instrument
and the credit.

8. Where Payment Be Made.

• If there is a stipulation, then in the place designated.

• If there is no stipulation –
o If the obligation is to give a determinate thing, wherever the thing might be
at the time the obligation was constituted.
o If the obligation is to give a generic thing or an obligation to do, then at the
domicile of the debtor.

9. Special Forms of Payment.

• Dation in payment
• Application of payment
• Payment by cession
• Tender of payment and consignation

10. Dation in Payment, Concept.

Dation in payment is a special form of payment where the ownership of property is

transferred to the creditor to pay a debt in money. (Art. 1245, NCC) It is governed by the
law of sales since it partakes in a sense the nature of a sale with the creditor in effect buying
the property of the debtor.

Requisites
1. Existence of a money obligation
2. Alienation to the creditor of a property by the debtor with the consent of the former
3. Satisfaction of the money obligation of the debtor

11. Effect of Extraordinary Inflation or Deflation.

In case an extraordinary inflation or deflation of the currency stipulated should supervene,

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. (Art. 1250, NCC)

Formula: A = (B / C) x B

where: A = amount to be paid at maturity

B = amount of the obligation
C = value on the date of maturity

12. Application of Payment, Concept.

It is the designation of the debt to which payment shall be applied when the debtor owes
several debts in favor of the same creditor. (Art. 1252, NCC)

Requisites:
1. There must be only one debtor and only one creditor
2. There must be two or more debts of the same kind
3. All of the debts must be due
4. The amount paid by the debtor must not be sufficient to cover the total amount of
all the debts
 How made:
a. The debtor who is given the preferential right to apply the payment, designates the
debt to be paid.
b. If the debtor does not make the designation, the creditor makes it by indicating the
debt being paid in his receipt. If the debtor accepts the receipt from the creditor, the
debtor cannot complain unless there is a just cause of invalidating the contract.
c. If neither the debtor nor creditor makes the designation, or application cannot be
inferred from the circumstances, payment shall be applied by operation of law as
follows:
1. Payment shall be applied to the debt, among those due, which is the most
onerous to the debtor.
2. If the debts are of the same nature and burden, payment shall be applied to
all due debts proportionately. (Arts. 1252 & 1254, NCC)

NOTE: In all instances, if the debt produces interest, payment of the principal shall not be
deemed to have been made until the interest have been covered. (Art. 1253, NCC)

13. Payment by Cession, Concept.

A special form of payment whereby the 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.

Requisites:
1. Plurality of debts
2. Partial or relative insolvency of the debtor
3. Acceptance of the cession by the creditors

14. Effects of Cession.

1. The assignment by the debtor of all his properties to the creditors shall ONLY
release him from responsibility for the net proceeds of the property assigned.
Hence, the extinguishment is only partial.
2. The creditors do not become the owners, but merely assignees with authority to
sell.
3. The debtor is released up to the amount of the net proceeds of the sale, unless there
is a stipulation to the contrary. The balance remains collectible.

15. Payment by Cession vs. Dation in Payment.

Payment by Cession Dation in Payment

There must be two or more creditors
The debtor is insolvent
Affects all the debtor’s properties, except
those exempt from execution
The creditors are authorized to sell only the
debtor’s properties
The debtor is not released as a rule
Plurality of creditors is not required
The debtor may not be insolvent
Does not affect all the debtor’s properties
The creditor becomes the owner of the
properties given as payment
The debtor is released as a rule

16. Tender of Payment and Consignation, Concept.

TENDER OF PAYMENT – the act of the debtor of offering to his creditor what is due
him.

CONSIGNATION – the act of depositing the sum or thing due with the judicial authorities
whenever the creditor refuses without just cause to accept the same, or in the cases when
the creditor cannot accept it.

17. Effect of Tender of Payment Without Consignation.

Tender of payment WITHOUT consignation does not extinguish the debt. Consignation
must follow.
18. Requisites (steps) for Tender of Payment and Consignation to Extinguish the
Obligation.

a. There must be a valid tender of payment (Art. 1256, NCC)

NOTE: The payment being tendered must be the thing contemplated, in legal
tender, complete, on the day it falls due, among other requisites for a valid payment.

b. The creditor refuses without just cause to receive the payment. (Art. 1256, NCC)
c. The persons interested in the fulfillment of the obligation must be notified by the
debt of his intention to deposit the sum or thing due with the judicial authorities.
(Art. 1256, NCC)
d. The sum or thig due is deposited with judicial authorities. (Art. 1258, NCC)
e. The persons interested in the fulfillment of the obligation must again be notified by
the debtor that the consignation has been made. (Art. 1258, NCC)

19. Effect of Consignation Duly Made.

If the consignation has been duly made, the debtor may ask the judge to order the
cancellation of the obligation. The obligation shall be extinguished after the creditor has
accepted the consignation or the judge has declared that the consignation has been properly
made. (Art. 1260, NCC)

20. Debtor’s Right to Withdraw the Sum or Thing Consigned.

a. Before acceptance by the creditor of the consignation or the declaration by the judge
that the consignation has been properly made –

The debtor may withdraw the sum or thing consigned as a matter of right, i.e., the
creditor’s consent is not required. Such withdrawal produces the following effects:
1. The obligation shall remain in force. (Art. 1260, NCC)
2. The co-debtors, guarantors, and sureties are not released. (Art. 1261, NCC)

b. After acceptance by the creditor of the consignation or the declaration by the judge
that the consignation has been properly made –

The debtor may withdraw the sum or thing consigned only with the consent of the
creditor. Such withdrawal produces the following effects:
1. The obligation shall be revived. (Art. 1260, NCC)
2. The creditor shall lose every preference which he may have over the thing.
3. The guarantors, the sureties are released unless they consented. If there are
several debtors and their obligation is solidary, such obligation will become
a joint obligation.

Thus, the creditor can no longer proceed against the guarantor or surety if
later on the debtor cannot pay. As regards the co-debtors, they are not
released from liability they being principal debtors. Their obligation
becomes joint if it was previously solidary.

21. When Consignation, Without a Previous Tender of Payment, Will Produce the Same
Effect.

a. When the creditor is absent or unknown or does not appear at the place of payment.
b. When he is incapacitated to receive the payment at the time it is due.
c. When, without just cause, he refuses to give a receipt.
d. When two or more persons claim the same right to collect.
e. When the title of the obligation has been lost. (Art. 1256, NCC)

22. Lost of the Thing Due, Concept.

A thing is considered 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. (Art. 1189, par. 2, NCC)
 Loss includes the physical or legal impossibility of the service in which the obligation
consists.

23. Loss, Effect on the Obligation.

a. EFFECT OF LOSS IN DETERMINATE OBLIGATIONS TO GIVE

General rule: Obligation is extinguished.

Requisites:
1. The thing which is lost must be determinate
2. The thing is without any fault of the debtor
3. The thing is lost before the debtor has incurred in delay

Exceptions:
1. When expressed by law
2. When stipulated by the parties
3. When nature of the obligation requires assumption of risk
4. When the object of the obligation is lost and the loss is due partly to the
fault of the debtor
5. When the loss of the thing occurs after the debtor has incurred in delay
6. When the debtor promised to deliver the same thing to two or more persons
who do not have the same interest
7. When the obligation to deliver arises from a criminal offense
8. When the obligation is generic

NOTE: The said obligation is converted into one for indemnity of damages.

b. EFFECT OF LOSS IN GENERIC OBLIGATIONS TO GIVE

General rule: The obligation continues to exist because a generic thing does not
perish (genus nunquam peruit)

Exceptions:
1. If the generic thing is delimited

Example: 50 kilos of sugar from my 1999 harvest and such harvest was
destroyed

2. If the generic thing has already been segregated or set aside, in which case
it has become specific.

c. EFECT OF LOSS IN PERSONAL OBLIGATIONS (OBLIGATION TO DO)

1. When the prestation becomes legally or physically impossible without the

fault of the debtor, the obligation is extinguished. (Art. 1266, NCC)
2. When the service has become so difficult as to be manifestly beyond the
contemplation of the parties, the obligor may also be released in whole or
in part. (Art. 1267, NCC)

24. Effect of Partial Loss.

The courts shall determine whether, under the circumstances, the partial loss of the object
of the obligation is so important as to extinguish the obligation. (Art. 1264, NCC)

25. Creditor’s Right if the Loss is Caused by a Third Person.

If the obligation has 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 reasons of the loss.
(Art. 1269, NCC)
26. Condonation or Remission, Concept.

Condonation or remission is an act of liberality by virtue of which the obligee, without

receiving any price or equivalent, renounces the enforcement of the obligation. As a result,
it is extinguished in its entirety or in that part or aspect of the same to which the remission
refers.

Requisites:

In order that there will be a remission which will result in the total or partial extinguishment
of the obligation:
1. It must be gratuitous
2. It must be accepted by the debtor
3. The obligation must be demandable

Kinds:
 As to form
1. Express remission – when it is made in accordance with the formalities
prescribed by law for donations.
a. When the remission an immovable property, the remission and the
acceptance must be in a public instrument. (Art.749, NCC)
b. When the remission involves a movable/personal property –
i. If the value of the property exceeds P5,000.00, the remission
and the acceptance must be in writing (public or private).
ii. If the value of the property is P5,000.00 or less, the remission
and the acceptance may be in any form, i.e., oral or in writing
(public or private). The remission, however, if made orally,
requires the simultaneous delivery of the thing or the
document representing the right remitted (Art. 748, NCC).

2. Implied remission – when it can be deduced from the acts of the creditor,
although not made in accordance with the formalities prescribed by law for
donations.

 As to extent
1. Total remission – when the entire obligation is extinguished
2. Partial remission – refers only to the principal or to the accessory obligation
or to an aspect thereof which affects the debtor. (i.e. solidarity)

 As to constitution
1. Inter vivos – that which is constituted by agreement of the obligee and the
obligor in which case it partakes of the nature of a donation inter vivos.
2. Mortis causa – that which is constituted by last will and testament in which
case it partakes of the nature of a donation mortis causa.

27. Effect of Remission/Renunciation of Principal Obligation on the Accessory

Obligation and Vice-Versa.

 The remission of the principal debt extinguishes the accessory obligation (based on
the accessory follows the principal rule).
 The remission of the accessory obligation does not carry with it that of the principal
debt. (Art. 1273, NCC)

28. Confusion or Merger, Concept.

Confusion or merger is the meeting in one person of the qualities or the characters of
creditor and debtor. (Art. 1275, NCC)

Effect: Confusion will necessarily result in the extinguishment of the obligation because
of the impossibility of enforcing it since it would be absurd for a person to enforce a claim
against himself.
29. Effect of Merger or Confusion on Guarantors.

If the confusion will take place in the person of either the principal creditor or the principal
debtor, the effect is the extinguishment, not only of the principal obligation but even the
accessory obligation. Consequently, guarantors shall be benefited by the confusion of
rights.

If the confusion takes place in the person of the guarantor, such will not extinguish the
obligation. (Art. 1276, NCC). Here, only the guaranty is extinguished.

30. Effect of Merger or Confusion in a Joint Obligation.

The confusion which takes place in one of the debtors shall only refer to the share which
corresponds to him. Consequently, there is merely a partial extinguishment of the debt.

31. Effect of Merger or Confusion in a Solidary Obligation.

Merger in one of the solidary debtors or solidary creditors extinguishes the whole
obligation. (Art. 1215, NCC)

The solidary debtor in whom the characters of debtor and creditor concur can demand
reimbursement from his co-debtors. (Art. 1217, NCC)

In the case of the solidary creditor, he shall be liable to his co-creditors for the share
corresponding to each of them. (Art. 1215, NCC)

32. Compensation, Concept.

Compensation shall take place when two persons, in their own right, are creditors and
debtors of each other. (Art. 1278, NCC)

Kinds:
 As to cause
1. Legal compensation – when it takes effect by operation of law from the
moment all the following requisites are present:
1. That each one of the obligors be bound principally, and that he be at
the same time a principal creditor of the other

Exception: A guarantor may set up compensation as regards what

the creditor may owe the principal debtor.

2. That 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. That the two debts be due
4. That both debts be liquidated and demandable
5. The over neither of them there be any retention or controversy
commenced by third persons and communicated in due time to the
debtor.

2. Voluntary compensation – when the parties who are mutually creditors and
debtors agree to compensate their respective obligations, even though all of
the requisites may not then be present

3. Judicial compensation – when it takes effect by judicial decree.

Example: Where one of the parties to a suit over an obligation has a claim
for damages against the other and the former sets it off by proving his right
to said damage and the amount thereof.

4. Facultative compensation – effected by a party who is entitled to oppose the

compensation because he would be prejudiced thereby.
 Example: When the obligation of one is with a term, while that of the other
is pure, and the former renounces the benefit of the term, consequently
making the compensation possible.

 As to effect
1. Total compensation – when the debts to be compensated are equal in
amount
2. Partial compensation – when the debts to be compensated are not equal in
amount.
33. Compensation when One or Both Debts are Rescissible or Voidable.

When one or both debts are rescissible or voidable, they may be compensated against each
other before they are judicially rescinded or avoided (Art. 1284, NCC)

34. Compensation when the Debts are Payable at Different Places.

Compensation takes place by operation of law, even though the debts may be payable at
different places, but there shall be an indemnity for expenses of exchange or transportation
to the place of payment. (Art. 1286, NCC)

35. Effect of Assignment on Compensation of Debts.

a. When the assignment was with the debtor’s consent, he cannot set up against the
assignee the compensation that would pertain the assignor unless he reserved his
right to the compensation.

Example: D owes C P20,000 due on March 15. C owes D P8,000 due on March
10. On March 12, C assigned his credit right to T with the consent of D. On March
15, T can collect from D P20,000, but D can collect P8,000 from C. If D reserved
his right to the compensation that would pertain to him against C amounting to
P8,000 when he consented to the assignment, then T can collect only P12,000 from
him.

b. If the debtor was notified of the assignment but he did not give his consent thereto,
the debtor may set up compensation of debts maturing before the assignment but
not of subsequent ones.

Example: D owes C P20,000 due on March 15. C, on the other hand, owes D the
following debts:
• P8,000 due on March 1;
• P3,000 due on March 8; and
• P5,000 on March 14.

On March 12, C assigned his credit right to T with notice to D but D did not give
his consent to the assignment. In this case, T may collect from D P9,000 because D
can set up compensation with respect to the debts due on March 1 (P8,000) and
March 8 (P3,000) which had already matured at the time of assignment.

c. If the assignment was without knowledge of the debtor, he can set up compensation
of all debts maturing before the time he obtains knowledge of the assignment.

Example: D owes C P20,000 due on March 25. C, on the other hand, owes D the
following debts:
• P8,000 due on March 1;
• P3,000 due on March 8;
• P5,000 due on March 14; and
• P2,000 due on March 31.

On March 12, assigned his credit right to T without the knowledge of D. On March
16, D learned of the assignment. In this case, T may collect from D P4,000 because
D may set up compensation with respect to the debts due on March 1 (P8,000),
 March 8 (P3,000), and March 14 (P5,000), which debts have become due as of
March 16 when D learned of the assignment.

36. Novation, Concept.

Novation is the substitution or change of an obligation by another, resulting in its

extinguishment or modification, 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.

Distinctive feature: Although it extinguishes the obligation, it also gives birth to another
obligation

Requisites:
a. A previous valid obligation
b. Agreement of the parties to the new obligation

Exceptions:
i. when the person of the debtor is changed which can be made even if it is
against the will of the debtor, or
ii. when another person is subrogated in the place of the creditor:
1. when a creditor pays another creditor who is preferred, even without
the debtor’s knowledge;
2. 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.

c. Extinguishment of the old obligation

d. Validity of the new obligation

Kinds:
 As to essence
1. Objective or Real – refers to the change either in the cause, object or
principal conditions of the obligations
2. Subjective or Personal – refers to the change of persons
a. Active - Substitution of the person of the debtor (always with the
creditor’s consent)
i. Expromision – a third person initiates the substitution and
assumes the obligation even without the knowledge or
against the will of the debtor.

Rights of the new debtor if he makes payment: If the

substitution was without the knowledge or against the will
of the original debtor, the new debtor can only recover
insofar as the payment has been beneficial to the debtor.
(Arts. 1236, 1237, & 1293, NCC)

Effect if new debtor is insolvent or does not fulfill the

obligation: The new debtor’s insolvency or non-fulfillment
of the obligation shall not give rise to any liability on the part
of the original debtor. (Art. 1294, NCC) The original debtor
is released from liability. This is true whether the
substitution was without the knowledge of the debtor or
against his will or it was consented to by him.

ii. Delegacion – it a the debtor who initiates the substitution,

which requires the consent of all parties (original debtor,
creditor, new debtor)

Rights of the new debtor if he makes payment: He can

recover what he has paid and is entitled to subrogation. (Arts.
1236, 1237 & 1293, NCC)
 Effect if new debtor is insolvent: The creditor’s right to
proceed against the original debtor is not revived except:
o When the insolvency of the new debtor was already
existing and of public knowledge when the original
debtor delegated his debt.
o When the insolvency of the new debtor was already
existing and known to the original debtor at the time
he delegated his debt.

b. Passive - Subrogation of a third person in the right of the creditor

3. Mixed – combination of objective and subjective novation. Hence, change

of object and parties

 As to form or constitution
1. Express – when it is declared in unequivocal terms that the old obligation is
extinguished by a new one which substitutes the same
2. Implied – when the old and the new obligations are incompatible with each
other on every point.

 As to extent or effect
1. Modificatory – when the old obligation subsists to the extent it remains
compatible with the amendatory agreement.
2. Extinctive – when an old obligation is terminated by the creation of a new
obligation that takes the place of the former

37. Effect of Novation on Accessory Obligation.

When the principal obligation is extinguished in consequence of a novation, accessory

obligations shall also be extinguished, except in the following cases:
 When the accessory obligation was established for the benefit of third person who
did not give their consent. (Art. 1296, NCC)
 When there was a stipulation that the accessory obligation will subsists
notwithstanding the novation.
 When the novation is one where a third person is subrogated in the rights of the
creditor.

38. Effect if New Obligation is Void.

If the new obligation is void, the novation is void. In such a case, the original one shall
subsists, unless the parties intended that the former relation will be extinguished in any
event. (Art. 1297, NCC)

39. Effect if the Original Obligation is Void.

The novation is void if the original obligation is void. (Art. 1298, NCC) If the original
obligation is void, there is no obligation to extinguish since it is non-existent.

40. Effect if the Original Obligation is Voidable.

The novation is valid provided that the annulment may be claimed only by the debtor or
when ratification extinguishes acts which are voidable. (Art. 1298, NCC) The novation
here cure whatever defects present in the original obligation.

41. Effect if Original Obligation is Subject to a Suspensive or Resolutory Condition.

The new obligation shall be subject to the same condition unless otherwise stipulated by
the parties. (Art. 1299, NCC)