OBLIGATIONS REVIEWER

EXTINGUISHMENT OF OBLIGATIONS
1. Payment or Performance
2. Loss of the thing due
3. Condonation or remission of debt
4. Confusion or merger of rights
5. Compensation
6. Novation
7. Annulment
8. Rescission
9. Fulfillment of Resolutory Condition
10. Prescription
11. Other causes

Payment or Performance
Payment means not only the delivery of money but also the performance, in any other manner, of an
obligation. (1232)
Thus, if the obligation is to portrait, payment consists in the performance of the service. Or if the obligation is to
deliver a certain ring, payment consists in the delivery of the thing.

How payment must be made?

1. There must be a delivery of the thing or rendition of the service that was contemplated.
a. 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. (1244)
Example: D is obliged to give C a Seiko wristwatch. D cannot compel C to accept a Rolex
wristwatch even if the latter is more valuable than a Seiko.
b. 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.
Example: (1) D is obliged to paint C’s car. He cannot substitute it with an obligation to paint C’s
house. (2) D borrowed P10,000 from C. C gave D one year to pay provided D must not enter a
casino before he has paid the debt. D cannot ask C that the “obligation not to enter a casino “be
substituted with “not to drink and smoke” during the term of the loan.
c. 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. (1246)
Example: D is obliged to give C 50 yards of textile. C cannot compel D to deliver first class wool
textile. Neither D can deliver to C a textile that shrinks substantially after first wash. If C happens
to be engaged in the sale of student uniforms, then D may give C the kind of textile fit for that
purpose.
d. If the obligation is a monetary obligation, the payment must be in legal tender.
What is 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).

2. The payment or performance must be complete. (1233)

Exceptions:
a. 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 obligee.
(1234)
Example: S agreed to deliver 20 fire extinguishers to B. after S has delivered 18 fire
extinguishers to B, there are no more fire extinguishers available. He wants to complete the
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delivery but there is no more stock available. S can recover the cost of 20 fire extinguishers less
damages suffered by B.
b. 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.
(1235)
Example:
D agreed to repair the car of C and to paint it red. D repaired the car but painted it maroon. C
accepted the car without any objection. D’s obligation is fully complied with notwithstanding the
irregularity of the performance.

When partial payments may be made?

The creditor cannot be compelled to receive, and the debtor cannot be compelled to make
partial payments, except:
i. When there is an agreement to that effect (1248)
ii. 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. (1248) The unliquidated part, once it is finally
determined, must also be paid, to extinguish the obligation.

Who must make the payment?

Payment must be made by the debtor who must possess the following:
1. The free disposal of the thing due.
Free Disposal – means that the property delivered should not be subject to any claim by or
encumbrances in favor of third persons. Thus, if a property mortgaged is used as a payment by the
debtor to a creditor other than the mortgagee, the payment is not valid. The said property can be made
to answer for the debt secured in case of foreclosure of the mortgage.

2. The capacity to alienate the thing.

The debtor must not be incapable of giving consent.

Effect on payment in obligations to give if debtor does not have free disposal and capacity to
alienate:
The payment shall not be valid except in cases provided by law. (1239)

Payment by third person

The creditor is not bound to accept payment or performance by a third person except in following
cases:
a. When there is a stipulation to that effect.
b. When the third person has an interest in the fulfillment if the obligation such as a guarantor or a
co-debtor.
Example: D borrowed P20,000 from C with G as guarantor. G, as a person who has an interest
in the fulfillment of the obligation, may compel C to accept payment from him
Rights of third person who makes payment:

a. He can recover what he has D owes C P10,000. The obligation

paid.
b. He is entitled to be subrogated
in the rights of the creditor such as
Payment with knowledge and
those arising from mortgage,
consent of the debtor
guaranty or penalty.
is secured by a mortgage of D’s
lot. T, a third person, pays C the
amount of P10,000 with the
consent of D. T can recover the
amount of P10,000 from D. If D
cannot pay, T, having been
subrogated in the rights of C, can
foreclose the mortgage.

He can recover only insofar as the
payment has been beneficial to
the debtor. He is not entitled to
subrogation. (1236 and 1237)
Payment without knowledge and
consent of the debtor
OBLIGATIONS REVIEWER
D borrowed P20,000 from C with
G as guarantor. D pays C P2,000.
T, a third person, pays C P20,000
believing that D still owed C
P20,000. T can only recover
P18,000 from D, the amount
beneficial to D. If D cannot pay, T
cannot go after G because he is
not entitled to be subrogated in
the rights of C.

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 (1238). In such a case, the third person He can recover only insofar as the payment has
been beneficial to the debtor. He is not entitled to subrogation. (1236 and 1237).
To whom shall payment be made?
1. To the creditor
2. To the creditor’s successors in interest, such as his heirs or assigns
3. To any person authorized to receive payment

Payment to an incapacitated creditor

The creditor must be capacitated to receive the payment. Payment to an incapacitated creditor is not
valid except:
a. It has kept the thing delivered.
Example:
D borrowed P10,000 from C. On due date, D paid the debt to C who had become insane. If C
kept only P4,000 and threw away P6,000, then payment will be valid only up to P4,000 only.

b. Insofar as the payment has been beneficial to him (1241)

Example: In the above example, if C used P3,000 to buy his food and lost the balance,
payment will be valid only up to P3,000, the amount beneficial to him.

Where payment must be made?

1. If there is a stipulation, then in the place designated
2. If there is no stipulation –
a. Determinate thing – wherever the thing might be at the time the obligation was constituted.
b. Generic thing – at the domicile of the debtor.
Special forms of payment
1. Dation in Payment
2. Application of payment
3. Payment by Cession
4. Tender of payment and consignation
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Dation in Payment
Dation in payment (dacion en pago, adjudicacion en pago, or datio in solutum), is a special form of payment
where the ownership of property is transferred to his creditor to pay a debt in money (1245). 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.
Example: D owes C P10,000. On due date, D proposes to C to accept a ring in payment of D’s debt of
P10,000. C agrees to D’s proposal and accepts the ring. D’s monetary obligation is extinguished by dation in
payment.

Application of payment
Application of payment – is the designation of the debt to which payment shall be applied when the debtor
owes several debts in favor of the same creditor. (1252)
Requisites:
1. There must be two or more debts.
2. The debts must be of the same kind.
3. The debts are owed by the same debtor to the same creditor
4. All debts are due
How application is made?
1. The debtor who is given the preferential right to apply the payment designates the debt to be paid.
2. If 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.
3. If neither the debtor nor the creditor makes the designation or application cannot be inferred from the
circumstances, payments shall be applied by operation of law as follows:
a. Payment shall be applied to the debt, among those due, which is the most onerous to the debtor.
b. If the debts are of the same nature and burden, payment shall be applied to all due debts
proportionately.

Payment by Cession
Payment by Cession – is the abandonment or assignment by the debtor of all his property in favor of his
creditors so that the latter may sell them and recover their claims out of the proceeds. (1255)
The cession or assignment operates only to authorize the creditors to sell the debtor’s property, hence,
ownership is not transferred to them. Unless agreed upon, the cession releases the debtor from his
responsibility only to the extent of the net proceeds of the things assigned (1255)
2 Kinds of Payment by Cession
1. Voluntary or conventional – agreed upon by the parties.
2. Legal – Cession by operation of law.
Requisites of payment by Cession
1. There must be two or more creditors.
2. The debtor is insolvent
3. The debtor abandons all his properties except those which are exempt from execution
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4. The creditors accept the abandonment.

Tender of payment and Consignation

Tender of payment – is the act of the debtor of offering to his creditor what is due him.
Consignation – is 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 cases when the creditor cannot accept it.
Example: D borrowed P50,000 from C. On due date, D tendered payment in P20 bills totalling P50,000 to C. C
refused to accept the payment demanding that he be paid in higher denominations. Since the payment
tendered by D was legal tender, C was not justified in refusing to accept it. D may thus consign the payment in
court.

LOSS OF THE THING DUE

Loss – 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. (1189 par. 2)
GR: The loss of the determinate thing extinguishes the obligation (1262)
XPN:
a. When the loss is due to the fault of the debtor
Loss of a Determinate b. When the debtor has incurred a delay.
thing c. When so provided by law.
d. When it is stipulated by the parties.
e. When the nature of the obligation requires the assumption of risk.
f. When the debt proceeds from a criminal offense.
The loss or destruction of anything of the same kind does not extinguish the
Loss of a Generic
obligation (1263), because a generic thing does not really perish.
thing
a. When the prestation becomes legally or physically impossible without the fault
of the debtor, the obligation is extinguished.
Loss in personal
b. When the service has become so difficult as to be manifestly beyond the
obligations
contemplation of the parties, the obligor may also be released in whole or in
part. (1267)

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. (1264)
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 reason of the loss. (1269)

CONDONATION OR REMISSION
Condonation or Remission – is the gratuitous abandonment by the creditor of his right. In plain language,
this refers to the forgiveness of an indebtedness. To extinguish the obligation, it requires the debtor’s consent.
(1270).
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Kinds of Condonation or Remission
1. As to amount or extent
a. Total
b. Partial
2. As to form
a. Express – one made orally or in writing. It must, to be valid, comply with the formalities of
donation as follows:
i. Immovable property – it must be in public instrument. The public document must specify
the property remitted and the value of the charges that the debtor (done) must satisfy.
(749).
ii. Movable property (personal property)
1. Value exceeds P5,000 – must be in writing (public or private)
2. Value is P5,000 or less – may be in any form (oral or written)
b. Implied – one inferred from the conduct of the parties, such as when the creditor voluntarily
delivers the private document evidencing the credit to the debtor. (1271)

CONFUSION OR MERGER
Confusion or merger – is the meeting in one person of the qualities or the characters of creditor and debtor
(1275).
Example: M makes a promissory note payable to P or order. P indorses the note to A, A to B, B to C and back
to M. the obligation is extinguished because M is now a creditor of himself.

COMPENSATION
Compensation – is a mode of extinguishing an obligation when two persons, in their own right, are debtors and
creditors of each other. (1278)
Example: D owes C P5,000. C owes D P5,000. The parties do not need to pay each other as their obligations
are extinguished by compensation.

NOVATION
Novation – it is the modification or extinguishment of an obligation by another, either by changing the object or
principal condition, substituting the person of the debtor, or subrogating a third person in the rights of the
creditor. (1291)
Example: D owes C P10,000. (1) if the parties later agree that D should give instead a ring to C, there is
novation by changing the object or prestation. (2) if the parties agree that T shall take the place of D as the
new debtor, there is novation by substituting the person of the debtor. (3) if the parties agree that X shall take
the place of C as the new creditor, there is novation by subrogating a third person in the rights of the creditor.
Requisites of novation
1. There must be a previous valid obligation
2. There must be an agreement between the parties to modify or extinguish the obligation, except in the
following:
a. When the person of the debtor is changed which can be made even if it is against the will of the
debtor or;
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b. When another person is subrogated in the place of the creditor:
i. When a creditor pays another creditor who is preferred, even without the debtor’s
knowledge
ii. 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.
3. There must be the extinguishment of the old obligation.
4. There must be a validity of the new obligation.
Kinds of Novation
As to object or purpose
a. Real or objective – novation by changing the object or principal condition.
b. Personal or subjective – novation by change of the parties (debtor or creditor)