9

Extinguishment of Obligations
Art. 1231-1250

Learning Target
 EXERCISE
A. Encircle the correct answer
1. Those were the payment and fulfillment of the obligation is done proportionately.in case joint parties are
the debtors.

a. Obligations
b. Joint divisible obligations
c. joint obligations
d. None of the above

2. If the obligation can be performed partially, like payment of money.

a. Obligations
b. Joint divisible obligations
c. joint obligations
d. None of the above

3. It allows a creditor, who is solidary bound with other creditors, to collect the entire debt from a debtor.

a. Solidary obligations
b. Joint divisible obligations
c. Joint obligations
d. Obligations

4. The failure of the creditor to demand performance of the obligation for an unreasonable length of time
renders the contract ______________?

a. Effective
b. Ineffective
c. Defective
d. valid

5. In the event of the loss of the prestation in a solidary obligation is due to a fortuitous event, then the
obligation shall be______________?

a. Fully paid
b. Lapse
c. Finished
d. extinguished

6. The provisions on joint solidary obligations only apply when there is ___________________?

a. Single debtor or creditor

b. One party
c. Multiplicity of parties
d. relationships

7. Indivisible obligation cannot be performed _______________?

a. Partially
b. Single
c. Double
d. reimbursement

8. Obligations with penal clauses actually involve two obligations, the principal obligation and an
_________________?

a. Partial obligation
b. Joint obligation
c. Penalty
d. Accessory obligation

9. Proof of actual damages suffered by the creditor is not necessary in order that the penalty may be
_____________?

a. Extinguished
b. Punished
c. Demanded
d. Counted

10. The remission of the whole obligation , obtained by one of the solidary debtors, does not entitle him to
_________________ from his co-debtors.

a. Payment
b. Reimbursement
c. Interest
d. None of the above.

CHAPTER 4
Extinguishment of Obligations

General Provisions
Article 1231. Obligations are extinguished:
(1) By payment or performance;
(2) By the loss of the thing due;
(3) By the condonation or remission of the debt;
(4) By the confusion or merger of the rights of creditor and debtor;
(5) By compensation;
(6) By novation.
Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a
resolutory condition, and prescription, are governed elsewhere in this Code. (1156a)

Extinguishment of an obligation means termination of the obligation; that is, the obligation ceases to
be due and demandable. There are a number of ways by which an obligation can be extinguished aside from
fulfillment or payment.

SECTION 1
Payment or Performance

Article 1232. Payment means not only the delivery of money but also the performance, in any other
manner, of an obligation. (n)

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. (1157)

Payment is the fulfillment of the obligation. The manner of fulfilling the obligation depends on the
specific obligation concerned; whether it is 1) to give or deliver a thing 2) to do or perform a service or an
act; or 3) not to do, which could either be not to give or not to perform.
There must be a complete delivery or complete performance because an essential element of payment as a
way of extinguishing an obligation is ïntegrity””- the payment must be complete or full, Generally,
incomplete delivery or incomplete performance is not considered payment .

1. Complete delivery
In an obligation to give, the rules for what is considered complete payment or delivery depends on whether
the obligation calls for the delivery of a determinate or indeterminate thing.

a. Determinate thing

If the obligation is to deliver a determinate thing, the thing agreed upon must be delivered.

Sample case

In one case, when Santos offered to return a solitaire ring to Hahn which is different
from that entrusted earlier to her (Santos), Hahn had the right to refuse it especially because
the ring being offered was less in value. The Court said that person who borrows a specific
thing must return the very same thing to the owner who lent it.

b. Indeterminate thing

If what is to be delivered is a generic or indeterminate thing, there is a complete delivery if

the thing given belongs to the same genus or species agreed upon.
If the parties have not specified the quality and circumstances of the generic or indeterminate
thing the obligee cannot demand delivery of a thing of a superior quality. Neither can the obligor
insist on giving a thing of inferior quality.

Illustration
 If X agrees to sell a car to Y for the price of P800,000. And X and Y have not
discussed the exact details of the car. Y cannot insist on a stretch limousine which costs much
more. Neither can X deliver a worthless rattletrap.

MONEY

When what is to be delivered is money as payment, the full amount due must be given. The creditor
cannot be compelled to accept partial payment unless this has been agreed upon like installment payments.
The debtor cannot also be required to make partial payments before the due date if the agreement is full
payment.
Sample case

Tao development Corp. (TAO), the creditor, lent Food Terminal Inc. (FTI) a sum of money.
Upon the maturity of the loan, TAO was to receive P7,194,453.60. On the due date, FTI offered the
amount of P7,148,433.72. TAO initially refused, but later on accepted. THereafter, TAO demanded
the balance FTI claims that the acceptance by TAO of the partial payment extinguished the entire
obligation. The Court ruled that FTI is wrong. Acceptance of the partial payment , the Court said,
does not extinguish the obligation, if the creditor demands for the remainder. Under Art. 1248, TAO
was justified in its initial refusal to accept FTI’s offer of a lower amount. TAO’s subsequent
acceptance of the partial payment , the Court rationalized, was simply being practical . And there
was no showing that TAO ever freed FTI from its obligation of paying the remaining amount.

There are, however , exceptions to the general rule of complete delivery.

Complete performance

In obligation to, the service or act agreed upon, for example to render a song performance, must be
performed, and the obligor cannot insist on another act,for instance dancing, if the obligee does not agree to
the change in the service or act.
Complete non-performance

The obligation not to do is complied with by the obligor not doing anything that will contravene or
violate the obligation.

Exceptions to the integrity or completeness rule

There are exceptions to the integrity or completeness rule, which is to say that sometimes, partial
delivery or partial performance may suffice to extinguish the entire obligation.

Article 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)

Substantial performance if good faith.

Substantial performance is one of the exceptions to the rule of integrity or completeness in the performance
of an obligation. The requisites are as follows:

1. There must be an attempt in good faith to perform the obligation, without any willful or intentional
deviation from said obligation.
2. The deviation from the obligation must be slight; and
3. The omission or defect must be technical and unimportant, and must not permeate the whole
obligation, which would otherwise frustrate the parties intended objectives.

Sample case
 In a contract to sell a piece of land, Angeles, the buyer, failed to pay one monthly installment
for more than four (4) months , despite demand by Calasanz, the seller. Said breach of the contract,
according to the Court, was slight and casual considering that the buyer had paid the monthly
installment for nine (9) years, aside from the initial down payment. Further, the Court said, the
obligation would have been fully paid in only a short time from the breach, There is already
substantial performance in good faith by the obligor. Allowing the seller to rescind the contract
because of the breach, the Court added will also unjustly enrich the obligee at the expense of the
obligor as it will lead the obligor’s forfeiture of all installments paid and all improvements made on
the land. Thus, in this case, the buyer should be allowed to pay the remaining installments, after
which the seller must immediately execute the final deed of sale in favor of the buyer

Article 1235. When the obligee accepts the performance, knowing its incompleteness or irregularity,
and without expressing any protest or objection, the obligation is deemed fully complied with. (n)

Obligee’s acceptance of incomplete or irregular performance

Essentially, Art. 1235 speaks of the obligee’s waiver of full and complete performance. Thus , It is another
exception to the rule on integrity or completeness of performance.

Sample case

The lessor ,Azcona, accepted the rental payment made by Jamandre, the lessee, for a
specific year knowing fully well that it is less by P200 than the amount agreed upon. Azcona
accepted the payment without any objection or reservation by the lessor of his right to collect the
balance. This, the Court ruled, means that the lessor accepted the amount paid by the lessee as full
payment. This is confirmed by the fact that the lessor did not make any demand, written or verbal,
for the balance.

Partial performance agreed upon

If there is an express stipulation for the obligee to receive partial performance, the obligee has to
accept partial payment, as in the case of payment by installment. Similarly, the obligor can be compelled to
make partial payments when they fall due, if this has been agreed upon.

Debt is partly liquidated and unliquidated

If the obligor owes sums of money to the obligee, and some of them are already liquidated or known,
while others are still subject to computation, the obligor has the right to pay already for the debt whose
amount is known.

Illustration

A owes two debts to B- one, specific amount of P1,000,000; and the other, B’s share in the
proceeds of a sale of goods that is yet to be figured out. A can already pay for the first debt, without
waiting for the liquidation or determination of the second debt.

Article 1236. The creditor is not bound to accept payment or performance by a third person who has
no interest in the fulfillment of the obligation, unless there is a stipulation to the contrary.
Whoever pays for another may demand from the debtor what he has paid, except that if
he paid without the knowledge or against the will of the debtor, he can recover only insofar as
the payment has been beneficial to the debtor. (1158a)
Article 1237. Whoever pays on behalf of the debtor without the knowledge or against the will of the
latter, cannot compel the creditor to subrogate him in his rights, such as those arising from a
mortgage, guarantee, or penalty. (1159a)

Article 1238. Payment made by a third person who does not intend to be reimbursed by the debtor is
deemed to be a donation, which requires the debtor's consent. But the payment is in any case valid as
to the creditor who has accepted it. (n)

Who pays
The obligor or debtor is the party who has the obligation to pay or fulfill the obligation. If the
obligor’s payment is complete, then the obligee is also required to accept it in the absence of any valid
reason for refusing the payment.
Payment by a third person with interest

By inference from Art. 1236, the creditor is also required by law to accept payment for the debtor’s
obligation when payment is made by a third person who has an interest in the obligation.

Example

Both guarantor and surety occupy the position of debtor vis-a-vis the creditor, and are
solidarily bound with the debtor. A surety is an insurer of the debt, while a guarantor is a person who
assures the solvency of the debtor. Therefore, the creditor can be compelled to accept payment from
the guarantor or surety.

Third person without interest

AZ third person is considered as having no interest in the obligation because she cannot be
compelled to fulfill the debtor’s obligation. Specific example of a third person without interest is the
debtor’s neighbor, who is neither the debtor’s guarantor or surety. Unless there is an agreement.

Sample case

Miguel entered into certain agreements with Artemio to ensure that he would obtain a portion
of Artemio’s land. He not only paid Artemio’s loan with PNB in order to release the mortgage over
the land, Miguel also bought from Artemio 1,171 sq. m. of the property (almost 94% of the 1,254
sq.m lot) under the Kasulatan ng Paghahati-hati Na May Bilihan. Miguel , however, failed to get his
portion of the property, and although he did not demand the return of the amounts he paid to PNB, it
is just equitable for Artemio to reimburse Miguel, said the Court. Applying Art. 1236, Artemio is the
debtor in the case, PNB, the creditor; and Miguel the third person who paid for the debtor’s
obligation. The amount Miguel may recover will depend on whether Artemio knew or approved of
the payment given by Miguel.
If payment was made with Artemio’s knowledge or without his objection, Miguel, the third
person, can collect the entire amount he paid. However, if payment was made without the debtor's
knowledge or against his will, the third person can only collect the amount that benefited the debtor.

What third person can collect

 Based on the case above, if a debtor (D) borrowed P1,000,000. From creditor ©, and has paid half of
it, and the third person without interest (TP) pays the entire amount of P1,000,000 with the knowledge of D,
then TP can collect the entire amount from D. D can then collect the excess of P500,000 which is with C,
who on the other hand, has the obligation to return said amount based on the legal principle that no one
should be unjustly enriched at the expense of another.
However, if TP paid without the debtor's knowledge or against the latter’s will, the third person can
collect from the debtor the beneficial amount -which is P500,000; and TP can collect the excess payment
from the creditor on the basis of solutio indebiti.

Third party’s right to subrogation

Subrogation is the right of a third party to acquire all the rights of the creditor. Whether or not the
third party has subrogation rights will depend on whether the third party has an interest in the fulfillment of
the obligation.
By inference from Art. 1236 and Art. 1237, the third person with interest like a guarantor or surety
can compel the creditor to subrogate or substitute her into the latter’s rights even if payment is made by the
third person without the debtor’s knowledge or consent.

Illustration

Using the example above, if debtor (D)’s debt of P1,000,000 with creditor ©, is supposed by
a security of mortgaged property, and third person without interest (TP) pays the entire amount of
P1,000,000 with knowledge of D, the TP can only collect the entire amount from D, but she can also
foreclose the mortgage if D does not pat TP. However, if TP pays the entire amount of P1,000,000
without knowledge of D or against his will , then TP can only collect the beneficial amount, and TP
cannot foreclose the mortgage if D does not pay the beneficial amount. TP is not subrogated into C’s
rights, Nonetheless, TP can exercise the rights given to the creditor under Art. 1177.

When a third person does not intend to be paid.

The third person who does not intend to be paid by the debtor will be considered a donor- a person
who gratuitously gives, and the debtor will be considered as the donee. Once the payment is made to the
creditor, and the creditor accepts payment by the third person without interest, the debtor’s obligation to the
creditor is extinguished. For a third person’s donation to be valid , however, the donee;i.e., the debtor, must
accept. If the debtor accepts the donation, then the obligation is extinguished by remission. However, if the
debtor does accept the donation,then she can be obliged by the third to pay. The amount that the third person
can collect depends on whether or not payment was made with (or without) the debtor's knowledge or
against her will.
Art. 1238 does not apply where the third person’s acts contradict any intent of donating to the debtor.

Article 1239. In obligations to give, payment made by one who does not have the free disposal of the
thing due and capacity to alienate it shall not be valid, without prejudice to the provisions of article
1427 under the Title on "Natural Obligations." (1160a)

When payment is not valid

Two facrtors that will make payment invalid are either; a) the person making payment does not have
the right to dispose of it, or b) is incapacitated like a minor or an insane person.

Illustrations
 a.D owes C a car that is to be delivered today. D gives to C the car of O, without Q’s
knowledge and permission. D does not fulfill his obligation because she cannot give O’s car
without Q’s permission as it is not D’s. D does not have free disposal of the thing due.

b. C lent money to D who subsequently became insane. When D pays on his own while
he is still insane, his payment to C is not valid as he is incapacitated, and does not have the
right to dispose of his property. Payment must be done by D’s guardian.

Article 1240. Payment shall be made to the person in whose favor the obligation has been constituted,
or his successor in interest, or any person authorized to receive it. (1162a)

To whom payment is made

In order to extinguish the obligation , payment must be made to the creditor or the creditor’s
successor-in-interest, who could either be the creditor’s heir or assignee. Payment may also be made to a
person authorized to accept payment on behalf of the creditor such as agents and guardians. Agents get their
authorization to represent the creditor from the creditor herself, while guardians are those who are
authorized by law or are appointed as such by the court to protect the interest of the creditor.

If payment is made to a wrong person, the debtor will remain indebted to the creditor if there is no
fault or negligence on the creditor’s part. Even if the debtor acted in utmost good faith, or was induced by
the fraud of a third person, the payment to one who is not in fact the creditor, or who is not authorized to
receive payment is void.

Sample case

Allied Bank issued a manager's check representing Lim’s money market placement in the
name of Lim as payee. However, a bank employee gave the check to a certain Santos without Lim’s
authorization. Being negligent, the bank remained indebted to Lim because payment was not made to
the creditor, Lim , or any person authorized by Lim to receive payment on her behalf.

Article 1241. 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. Such benefit to the creditor need not be proved in the following cases:
(1) If after the payment, the third person acquires the creditor's rights;
(2) If the creditor ratifies the payment to the third person;
(3) If by the creditor's conduct, the debtor has been led to believe that the third person
had authority to receive the payment. (1163a)

Defective payments

Payment to an incapacitated person

Payment made directly to a person incapacitated to administer her own property is not valid unless:

1. The incapacitated creditor kept the thing delivered

2. The payment benefited the incapacitated creditor.

To extinguish the obligation to an incapacitated creditor, paymwnt must be made through the guardian.
 Illustration

D owes P5,000,000 to C, who dies before D could pay. D is still obliged to pay the debt
despite C’s death. Assuming that M, minor child of C, is the only heir of C, D is obliged to pay M
through M’s guardian, like her grandparents. If D gives the money directly to M, such payment does
not extinguish the obligation unless M puts the money in the bank, or M asks her guardian to buy a
house using said payment. However, if M loses the money to a thief right after she receives the
money, Then D can be made to pay again.

Payment to a third person

Payment made to a third person, instead of the creditor, is not valid, and will not extinguish the
obligation. Exception is when such payment benefits the creditor, and the debtor has the burden of proving
said benefit.

Sample case

On 7 October 1987, Expertravel, Inc., a local travel agency issued four round trip for tickets
to Hong Kong to its client, Mr. Lo, for a total of P39,677.20. The travel agency sued Mr. Lo for not
paying the agency. It was shown, however, that Mr. Lo paid the company’s chairperson, Mr. De
Vega, with a check bearing the amount of P42,175.20. Mrs. De Vega then issued her own check in
favor of Expertravel, Inc. to the amount of P50,000.00 with the notation “placement advance for R.
Lo. etc.” The travel agency’s invoice shows that it received the sum on October 10,1987, and the
amount remained in its possession up to the present. The Court said that payment was made to a
third person; i.e., the travel agency’s chairperson, redounded to the creditor’s benefit. Thus, Mr. Lo’s
payment was valid, and therefore extinguished his obligation to Expertavel, Inc.

Instances when benefit to creditor need not be proven

1. Third person acquires creditor’s rights.

Payment made to a third person instead of the creditor will also become valid if the third
person subsequently acquires the rights of the creditor; i.e.,the third person becomes an assignee of
the creditor.

Illustration

In the case above, if the travel agency owes money to the chairperson, and assigns its
receivable from Mr. Lo to the chairperson, then Mr. Lo does not have the burden of proving
the benefit to the travel agency. It is clear that the travel agency’s own debt is extinguished by
Mr. Lo’s payment to the third person.

2. Payment to third person is ratified by the creditor

Ratification means the approval or confirmation of the act of payment as when the creditor
tells the debtor that payment to the third person is accepted or approved by the creditor.

( discussion on ratification under Art. 1393)

3. Estoppel
 The third instance where benefit to the creditor need not be proven is if by the creditor’s
conduct, the debtor has been led to believe that the third person had authority to receive the
payment. This is an instance of “estoppel”. Where a person is prohibited from denying something
that she has previously said or represented as the truth if it will injure another.

Essential elements of estoppel

1. Conduct of a party that falsely represents or conceals material facts that are inconsistent with those
that said party subsequently attempts to assert.
2. “Intent, or at least expectation, that this conduct shall be acted upon by, or at least influence, the
other party.
3. Knowledge, actual or constructive, of the real facts.

The essential elements with respect to the party claiming the estoppel

1. Lack of knowledge and of the means of knowledge of the truth as to the facts in question.
2. Reliance, in good faith, upon the conduct or statements of the party to be estopped.
3. Action or inaction based thereon of such character as to change the position or status of the party
claiming the estoppel, to his injury, detriment , or prejudice.

Sample Cases

1.Spouses Valarao collected loan repayments from Arellano the debtor, by asking their maid
to go to the debtor and make the collection. Later, the maid ran away with the collection. The
creditors claimed that the payment to the maid was not valid because the maid did not have a special
power of attorney to accept payments on her behalf. The Court ruled that payments made by the
debtor to the creditors' maid were considered valid because the maid had received monthly payments
in the past on the creditor’s behalf. The creditors were estopped from denying that the maid had such
authority.

2. Estoppel , however, did not apply to San Miguel Corporation (SMC) when it's dealer,
Culaba, paid to a “supervisor” of SMC, who was wearing an SMC uniform and drove an SMC van.
The “supervisor” appeared to be authorized to accept payments as he showed a list of customers’
accountabilities and even issued SMC liquidation receipts which looked genuine.” However, Culaba
failed to ascertain the identity of the authority of the said supervisor. He also did not ask for any
identification to prove that the latter was, indeed, an SMC supervisor . Culaba only relied on the
man’s representation that he was collecting payments for SMC. The court enumerated other factors
that prevented the application of the estoppel principle against SMC: a) the receipts issued by the
supervisor were included in SMC’s lost booklet; b) one receipt bearing a higher serial was issued
ahead of a receipt bearing a lower serial number. c) the collecting person’s name was left blank, and
d) Culaba cannot even recall the name of the “supervisor”.

Article 1242. Payment made in good faith to any person in possession of the credit shall release the
debtor. (1164)

Generally, only payment that is made to the creditor herself will extinguish the obligation. Art. 1242
provides an exception to this rule -If the payment is made in good faith to the person in possession of the
credit, the debtor is released. Thus there are two elements for this exception to apply - a) payment must
have been made in good faith and b) payment must be made to the person in possession of the credit.

The person in possession of the credit is not the creditor herself and is not someone authorized by the
creditor to collect the debt, but is a person who appears, under the circumstance, to own credit. Possession of
the credit does not refer to the material custody of the document evidencing the debt, but the actual or
apparent ownership of the credit.

Illustration

Odin dies leaving his only child, Thor, as his heir. Thor collects the debts owed to Odin from
Balder, a debtor who knows that Odin has died and Thor is the only heir. Thus Balder’s payment to
Thor, the person in possession of the credit, will extinguish the obligation even if it later turns out
that Odin had disinherited Thor in his will. Balder’s payment was done in good faith.

Sample case

Reynaldo, a tenant, paid the rent to Virgilio because Virgilio claimed the leased property as
his. However, Virgilio’s siblings were asserting their co-ownership of said property being part of
their inheritance. Since reynaldo was aware of the siblings claim, the payment made by him to
Virgilio was not done in good faith; thus it did not extinguish his obligation to pay rent again.

Article 1243. Payment made to the creditor by the debtor after the latter has been judicially ordered
to retain the debt shall not be valid. (1165)

When payment to creditor is not valid

The general rue is that payment to the creditor extinguishes the obligation. However, if there is a
court order addressed to the debtor to retain the debt, i.e., not to pay the creditor, such order must be
followed by the debtor. If the debtor insists on paying the creditor in violation of the court order, such
payment does not extinguish the debtor’s obligation. And the debtor could be made to pay again.

Illustration

A, a businessman, produced a non digital movie and bought film on credit from B, a film
supplier, worth P1,000,000. Subsequently, the movie is shown in Cinema C, which then becomes a
debtor to A, as there is an obligation to remit or give the box office proceeds to A. Before C can
deliver the money, B sues A to collect; and in the same case, B asks the court to order C not to give
the box office proceeds and B wins his case against A, the court can order C to pay B again.
Once C pays B, C’s obligation to A is extinguished, at the same time that A’s debt to B is
also extinguished. C, who has paid twice, one valid, the other one valid, can recover the money
earlier given to A, who cannot be unjustly enriched at the expense of C.

Article 1244. The debtor of a thing cannot compel the creditor to receive a different one, although the
latter may be of the same value as, or more valuable than that which is due.
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. (1166a)

See the earlier discussion on obligation to give determinate thing and to perform service under Art.
1233.

Article 1245. Dation in payment, whereby property is alienated to the creditor in satisfaction of a debt
in money, shall be governed by the law of sales. (n)
 See the discussion below on special ways of making payment.

Article 1246. 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 purpose of the obligation and
other circumstances shall be taken into consideration. (1167a)

See the earlier discussion on obligation to give indeterminate thing Art 1233

Article 1247. Unless it is otherwise stipulated, the extrajudicial expenses required by the payment
shall be for the account of the debtor. With regard to judicial costs, the Rules of Court shall govern.
(1168a)

Ordinary expenses incurred by the debtor in order to fulfill the obligation, like packaging or
transportation expenses, will be shouldered by the debtor, as she is the party interested in extinguishing the
obligation. Judicial expenses arising from a court case when it is filed to compel fulfilment of the
obligation is usually borne or paid by the losing party.

Article 1248. Unless there is an express stipulation to that effect, the creditor cannot be compelled
partially to receive the prestations in which the obligation consists. Neither may the debtor be
required to make partial payments.
However, when the debt is in part liquidated 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. (1169a)

See the earlier discussion on obligation to give money under Art. 1233.

Article 1249. 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.
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.
In the meantime, the action derived from the original obligation shall be held in the
abeyance. (1170)

What is legal tender

Legal tender means the currency which can be used for the payment of debts, public and private,
which cannot be refused by the creditor. The legal in the Philippines is the Philippine peso. If payment is to
be made in coins, the “ maximum amount of coins to be considered as legal tender is as follows:

1. One Thousand pesos (P1,000) for denominations of 1-Piso, 5-Piso and 10-Piso coins; and
2. One hundred pesos (P100.00) for denominations of 1-sentimo, 5-sentimo. 10-sentimo, and
25-sentimo coins.

If the debtor wishes to pay her debt, the credito can refuse if the debtor does not pay with legal
tender, but with US dollars, gold bars, a personal check, or some other means.
The parties may also stipulate the currency in which payment will be made. This notwithstanding, if
the creditor accepts payment by check,then the obligation is extinguished, subject to the condition
mentioned below.
Payment with check
The check as a medium of payment in commercial transactions in the Philippines is without doubt
already established by common usage. Payment by check is considered payment only when the check has
been cashed. Or credited to the account of the obligee. If the check bounces when presented for payment
due to the payor's lack of funds in the drawee bank, then there is no payment made, and the obligation is not
extinguished. The debtor who issued the bouncing check continues to be in default.

Cashier’s check
A cashier’s check is a check that is certified by the bank on which it is drawn, and the certification is
equivalent to acceptance. Said certification “implies that the check is drawn upon sufficient funds in the
hands of the drawee (bank), that they have been set apart for its satisfaction, and that they shall be so applied
whenever the check is presented for payment, issued by a third person, and which document is given by the
debtor to the creditor as payment.

Stale check is not impaired check

If the creditor is paid with a check, the failure of the creditor to encash the check within six months
from its due date leads to the check being stale. This does not lead to the impairment of the check. The
creditor will need to ask the debtor to replace the stale check by issuing another check for encashment.

Impaired mercantile document

Art. 1249 second paragraph refers only to a document , like a bill of lading (e.g., check) issued by a
third person and which document is given by the debtor to the creditor as payment. If the bill of exchange is
dishonored by the person who is supposed to pay it because of some reason, and the creditor does not protest
said non-payment, such negligence on the creditor’s part leads to the impairment of the document. The
creditor’s inaction has caused the loss of the right to file action against the people who might be liable for
the document’s dishonor.

Article 1250. 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. (n)

Extraordinary inflation or deflation of currency means any uncommon decrease or increase in the
purchasing power of currency which the parties could not have reasonably foreseen. The increase or
decrease is such that it is clearly beyond the contemplation of the parties at the time they enter into the
obligation.
For Art. 1250 to apply; i.e., for extraordinary inflation (or deflation) to affect an obligation, the
following requisites must be proven:

1. There is an official declaration of extraordinary inflation or deflation by the Bangko Sentral ng

Pilipinas (BSP)
2. The obligation is contractual in nature; and
3. The parties expressly agreed to consider the effects of the extraordinary inflation or deflation.

If the situation calls for the application of this provision, there will be corresponding adjustment or
increase in the contract price, using as basis the value of the currency at the time the contract was entered
into.
Art. 1250 does not apply to a situation where the BSP has not declared a situation of extraordinary
inflation despite the peso’s devaluation; and where the parties did not stipulate to consider the effects of
extraordinary inflation or deflation.
There must be proof of the extraordinary change in the purchasing power of the currency, like the
movement of the price index of goods and services from the time that the obligation is entered into
compared to the time of the obligation’s performance or fulfillment.
Guided Practice : Is the Extinguishment of an obligation ends the relationship of the debtor and the
creditor? Why?

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REFERENCES

Letty Hahn vs. Court of Appeals, et.al. G.R. No. 55372, May 31, 1989
Barona Marketing Corp. vs. Court of Appeals G.R. No. 126486, February 9,1998
Angeles et.al. vs. Calasanz et.al. G.R. No. L-42283, March 18,1985
Azcona vs. Jamandre, G.R. No. L-30597, June 30,198