HANDOUT #16 (2023)

THE LAW ON OBLIGATIONS AND CONTRACTS

EXTINGUISHMENT OF OBLIGATIONS

ART. 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.

I. PAYMENT

Other causes of extinguishment of obligations, such as annulment, rescission,

fulfillment of a resolutory condition, and prescription, are governed elsewhere in
this Code.

Payment may consist of 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. When a debtor pays
damages or penalty in lieu of the fulfillment of an obligation (see Art. 1226.), there is also
payment in the sense used in Article 1232.

In law, payment and performance are synonymous.

-A debt is considered to be paid when the obligation has been completely delivered or
performed (Art. 1232), EXCEPT, in the event that there has only been partial compliance,
the creditor willingly accepted the payment or performance knowing fully well that it is
incomplete without any protest. (Art. 1233)

ART. 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)

When debt considered paid.

A debt may refer to an obligation to deliver money, to deliver a thing (other than money),
to do an act, or not to do an act. (supra.)

(1) Integrity of the prestation. — This requisite means that the prestation be fulfilled
completely. (Alonzo vs. San Juan, 451 SCRA 45 [2005].) A debt to deliver a thing
(including money) or to render service is not understood to have been paid unless the
thing or service has been completely delivered or rendered, as the case may be.

Partial or irregular performance will not produce the extinguishment of an obligation as

a general rule.

Neither a late partial payment forestall a long-expired maturity date. (Selegna

Management & Dev. Corp. vs. United Coconut Planters Bank, 489 SCRA 125 [2006].)

EXAMPLES:

(1) D bound himself to pay C P10,000.00. D is giving only P9,000.00. C can refuse to accept
P9,000.00 because the fulfillment is not complete.

(2) X agreed to paint the house of Y for P50,000.00. X did not paint the kitchen anymore
and instead asked Y to pay him P50,000.00 less the cost of painting the kitchen. Y can
refuse to pay X because the debt of Y (to deliver money) will arise only after the debt of
X (to paint the house) is completely rendered. (see Art. 1191.)

ART. 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)

Recovery allowed in case of substantial performance in good faith.

Article 1234 is the first exception to the rule laid down in Article 1233. The reason for the
exception given by the Code Commission is as follows:

“The above rule (Art. 1234.) is adopted from American Law. Its fairness is evident. In case
of substantial performance, the obligee is benefited. So the obligor should be allowed to
recover as if there had been a strict and complete fulfillment less damages suffered by the
obligee. This last condition affords a just compensation for the relative breach committed
by the obligor.” (Report of the Code Commission, p. 131.)

Requisites for the application of Article 1234.

The requisites are:

(1) There must be substantial performance. Its existence depends upon the
circumstances of each particular case; and
(2) The obligor must be in good faith. Good faith is presumed in the absence of proof to
the contrary. (see Duran vs. Intermediate Appellate Court, 138 SCRA 489 [1985]; Tan vs.
G.V.T. Engineering Services, 498 SCRA 93 [2006].)

EXAMPLE:

S obliged himself to sell 1,000 bags of cement to B for a certain price. However, despite
diligent efforts on his part, S was able to deliver only 950 bags because of cement shortage.
Take note that S wants to comply with his obligation to deliver the entire 1,000 bags but
he could not do so for reasons beyond his control.

Under Article 1234, S can recover as though there had been complete delivery less the
price of the 50 bags. In other words, B cannot require S to deliver first the remaining 50
bags as a condition to his liability for the price. He must pay for the 950 bags and enforce
his right to damages for failure of S to deliver the difference. It is incumbent upon S,
however, to explain satisfactorily his failure to make complete delivery.

Legal tender in the Philippines.

Legal tender is that currency which a debtor can legally compel a creditor to accept in
payment of a debt in money when tendered by the debtor in the right amount. (see Black’s
Law Dictionary.)

In the Philippines, all coins and notes issued by the Bangko Sentral ng Pilipinas constitute
legal tender for all debts, both public or private.

Pursuant to Section 52 of Republic Act No. 7653 and Monetary Board Resolution No. 862
dated 6 July 2006, the maximum amount of coins to be considered as legal tender is
adjusted as follows:

One thousand pesos (P1,000.00) for denominations of 1-Peso, 5-Peso and 10-Peso coins;
and

One hundred pesos (P100.00) for denominations of 1-Centavo, 5-Centavo, 10-Centavo,

and 25-Centavo coins.

All coins and bills above P1.00 are, therefore, valid legal tenders for any amount.

-A creditor has the right to refuse the payment by the debtor by means of checks or
promissory notes. The reason being is that promissory notes or bank checks are NOT
LEGAL tender in the Philippines.

However, a creditor may accept it if he wishes to do so but he cannot be forced by his

debtor to accept it as a form of payment.
ART. 1235. When the obligee accepts the performance, knowing its incompleteness or
irregularity, and without ex- pressing any protest or objection, the obligation is
deemed fully complied with. (n)

Recovery allowed when incomplete or irregular performance waived.

The above provision is the other exception to Article 1233. It is founded on the principle
of estoppel. In case of acceptance, the law considers that the creditor waives his right.
The whole obligation is extinguished.

If the payment is incomplete or irregular, the creditor may properly reject it.

Principle of Estoppel

The term estoppel refers to a legal principle that prevents someone from arguing
something or asserting a right that contradicts what they previously said or agreed to by
law. Put simply, estoppel prevents one person from contradicting an action or statement
from the past.

Requisites for the application of Article 1235.

The requisites are:

(1) The obligee knows that the performance is incomplete or irregular; and

(2) He accepts the performance without expressing any protest or objection.

*Therefore, in the event that the obligor/debtor would deliver an object which is different
from what was agreed upon, the obligee/creditor should make known his objection to
the deviation of their agreement and he must not accept the object or else he could be
considered to have accepted the object without making any objection thereby putting him
in estoppel.

II. By Loss of the Thing Due

-Whenever the object of the obligation becomes lost or it has become legally or physically
impossible for him to perform it.

*Remember the rules pertaining to the loss of the object through a fortuitous event.

III. Condonation or remission of the debt

Condonation or remission is the gratuitous renunciation by the creditor of his right

against the debtor resulting in the extinguishment of the latter’s obligation in its entirely
or in that part of the same to which the renunciation refers.

It is thus a form of donation.

IV. Confusion or Merger

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

D owes C P1,000.00 for which D executed a negotiable promissory note in favor of C. C

indorsed the note to X who, in turn, indorsed it to Y.

Now, Y bought goods from the store of D. Instead of paying cash, Y just indorsed the
promissory note to D.

Here, D owes himself. Consequently, his obligation is extinguished by merger.

*In essence, D the debtor has become his own creditor when the promissory note was
indorsed back to him.

V. Compensation

Compensation is the extinguishment to the concurrent amount of the debts of two

persons who, in their own right, are reciprocally principal debtors and creditors of each
other. (Arts. 1278, 1290.)

It involves the simultaneous balancing of two obligations in order to totally extinguish

them if they are of the same amount or to the extent in which the amount of one is
covered by that of the other, if of different amounts.

EXAMPLE:
A owes B the amount of P1,000.00. B owes A the amount of P700.00.

Both debts are due and payable today. Here compensation takes place partially, that is,
to the concurrent amount of P700.00. So, A shall be liable to B for only P300.00. If the
two debts are of the same amount, there is total compensation. (Art. 1281.)

The two debts are extinguished without actual transfer of money between the parties.

VI. Novation

Novation is the total or partial extinction of an obligation through the creation of a new
one which substitutes it.

It is the substitution or change of an obligation by another, which extinguishes or

modifies the first, either by changing its object or principal conditions, by or substituting
another in place of the debtor, or by subrogating a third person in the rights of the
creditor.

It does not operate as an absolute extinction in the sense that it ends with the
extinguishment of an obligation but only as a relative extinction because it creates a new
one in place of the old which is thus only “modified.”
Novation is never presumed. It must be clearly and unmistakable established either by
the express agreement of the parties or acts of equivalent import or by the
incompatibility of the two obligations with each other in every material respect.

Test of Incompatibility between two obligations or contracts

The test is whether they can stand together, each one having an independent existence.
If they cannot, they are incompatible and the subsequent obligation novates the first.

Upon such novation, the former obligation loses all its force and effect and only the new
obligation can be enforced.

Example:

1. S agreed to deliver to B a car on November 10. Subsequently, a second agreement

was entered into whereby S would deliver a truck on November 10, is there a
novation? Is S no longer bound to deliver a car on November 10 because he later
on promised to deliver a truck on the same date?

NO, because it is not so declared expressly by the parties in their second agreement
and the two obligations are not incompatible, meaning, S can deliver a car and a
truck simultaneously on November 10.

2. Suppose the obligation of S is to construct a residential house on Lot 123 which is

owned by Z. Later on, S and Z agreed that a commercial building will be
constructed on the entirety of Lot 123. (In effect, it would be impossible to
construct a house on Lot 123).

In this case, there would be novation in this case even in the absence of an express
agreement between S and Z because the two obligations are absolutely
incompatible with each other.

Sources:

The Law On Obligations and Contracts, De Leon

-LGU