FINAL TERM

OBLICON
REVIEWER
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
GENERAL PROVISIONS

Article 1231. Obligations are extinguished;

1. By payment or performance;
2. By 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)

Causes of Extinguishment of Obligations

Other causes are..

1. Death of a party in case of an obligation requiring personal service (part 1 Art.1311)

2. Mutual desistance or withdrawal
3. Arrival of resolutory period (part 2, Art 1193)
4. Compromise (Art. 2028)
5. Impossibility of fulfillment (Art 1266) and;
6. Happening of a fortuitous event (Art 1174)

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.
Meaning of Payment

Payment refers only to the delivery of money (ordinary parlance)

Payment may consist of not only the delivery of money but also the giving of a thing (other
than money), the doing of an act, or not doing an act (legal mode of extinguishing an
obligation)

Note:

In law payment and (specific) performance are synonymous

Upon the payment the obligation is extinguished, once extinguished, the obligation ceases
to exist.

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
maybe (1157)

When debt is considered paid

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.

Elements or characteristics of a valid payment.

1. Integrity of Prestation
a. 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 (Rule is not absolute because there are exceptions.)
2. Identity of the Prestation
a. the very prestation due must be delivered or performed (see Art 1244)

General rule: Partial or irregular payment/performance will not produce the extinguishment
of an obligation.

Burden of proving payment

When the existence of the debt is admitted by the debtor or established by the evidence of
the creditor, the burden of proving extinguishment by payment devolves upon the debtor who
claims payment.

Only when the debtor introduces evidence that his obligation has been paid or
extinguished does the burden shift to the creditor.

Note: Under Article 1233, the contract is subject to rescission or cancellation

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. (adapted from American Law)

NOTE: The article refers to the exceptions of the Integrity of prestation.

Recovery is allowed in case of substantial performance in good faith

Article 1234 is the first exception to the rule laid down by in Article 1233
Reasons for exceptions
In case of substantial performance, the obligee is benefitted. So the obligor should be
allowed to recover as if there had been a strict complete fulfillment less damages
suffered by the obligee.

Requisites for the application of Article 1234

The requisites are....

1. There must be substantial performance; and

2. The obligor must be in good faith.

Article 1234

Embodies the doctrine of substantial performance

There is substantial performance when the important or essential part of the
contract has been performed and only a small or minor part thereof has not been
carried out.
Allows only a proportionate reduction in the amount recoverable by the obligor.
Good faith is an honest intention.

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. (Partial compliance)

Note: Refers to the exception of the Integrity of Prestation.

Recovery is allowed when incomplete or irregular performance is waived.

Article 1235 other exception to Article 1233 (founded on the principle of estoppel.)
:3
1. If the payment is incomplete or irregular, the creditor may properly reject it.
 2. In case of acceptance, the law considers that he waives his right. The whole obligation is
extinguished.

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

NOTE: If the obligee accepts the performance or the delivery of the thing without expressing
any protest or objection, the obligation is deemed fully complied with.

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.

Persons to whom the creditor must accept payment

The creditor is bound to accept payments or performance to the following.....

1. The debtor;
2. Any person who has an interest in the obligation (like a guarantor); or
3. A third person who has no interest in the obligation when there is a stipulation that he can
make payment.

Creditor may refuse the payment by the third person

The creditor cannot refuse payment by the third person but the Commission believes that
the creditor have the right to insist on the liability of the debtor.
Moreover, the creditor should not be compelled to accept payment from the third person
whom he may dislike or distrust.

Effect of payment by a third person

Simplified:

1. If made without the knowledge or against the will of the debtor

The third person may only ask for a reimbursement.
Cannot be foreclosed by a third person.
The creditor may foreclose.
 2. If made with the knowledge of the debtor
The third person can have Subrogation + reimbursement to (may be the guarantor)
Can foreclose.

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, guaranty, or penalty. (for the benefit of the debtor)

Right of a third person to subrogation

The payer/third person paying on the behalf of the debtor is entitled to subrogation (if the
payment is with the consent of the debtor)
The third person cannot compel the creditor to subrogate him in the debtor's accessory
rights of mortgage, guaranty, or penalty. ( if the payment is without the knowledge or
against the will of the debtor)

Q1: May there be subrogation, if the creditor willingly permits the payor to be subrogated in
his right?

A1: No. Subrogation can only take place with the consent of the debtor

Subrogation and reimbursement distinguished

Subrogation Reimbursement

The person who pays for the debtor is put
into the shoes of the creditor
The third person is entitled by reason of
payment has merely the bare right to be
refunded to the extent provided in the
second paragraph of Article 1236 without
the right to guarantees and securities of
the original obligation.

The payor acquires only the right to be There is no real extinction of the obligation,
reimbursed for he has paid but also the but only a change of creditor.
rights which the creditor could have
exercised pertaining to the credit either
against the debtor or against third persons,
 be they guarantors or possessor of
mortgages.

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. (requires the consent of debtor)

Payment by a third person who does not intend to be reimbursed

Article 1238- "embodies the idea that no one should be compelled to accept the generosity
of another"
If the paying third person does not intend to be reimbursed, the payment is deemed a
donation which requires the debtor's consent to be valid
However, if the creditor accepts the payment, it shall be valid as to him and the payor
although the debtor did not give his consent to the donation.

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 (transfer) it shall not be valid, without
prejudice to the provisions of Article 1427 under the Title on "Natural Obligations" (1160)

Meaning of "free disposal of thing due" and "capacity to alienate"

1. Free disposal of the thing due- the thing to be delivered not be subjected to any claim or lien
or encumbrance (e.g., mortgage, pledge) of a third person
2. Capacity to alienate- the person is not incapacitated to enter into contracts (Arts. 1327,
1329) and for that matter, to make disposition of the thing due.

Free disposal of things due and capacity to alienate required

General rule...

An obligation to give, payment by one who does not have the free disposition of the thing
due and the capacity to alienate it is not valid. This means that the thing paid can be
recovered.

Art. 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)

Person to whom payment shall be made.

Payment shall be made to:

1. Creditor/Obligee (In whose favor obligation has been constituted)

2. His successor in interest (heir or assignee)
3. Any person authorized to receive it.

Meaning of "any person authorized to receive it."

Not only a person authorized by the creditor - also a person authorized by law to receive the
payment. (Art. 1240)
such as guardian,
executor or administrator of the estate of a deceased; and
assignee or liquidator of a partnership or corporation
or any other person authorized to do so by law
Payment in good faith to any person in possession of the credit - valid though such person
may not be authorized to receive the payment.

Art. 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
the authority to receive the payment.

Effects of payment to an incapacitated person.

General rule...

Payment to an incapacitated person---is not valid.

However, there is an exception...

An incapacitated person kept things paid or delivered

If payment has redounded to the benefit of the incapacitated person (the unjustly enrich
principle will apply)

Note:

Incapacitated person - not capable to administer or manage his property.

Effects of payment to a third person

General rule...

Third person or wrong party - is not valid

Exception...

Except insofar as it has redounded to the benefit of the creditor.

When benefit to creditor need not be proved by debtor.

but the debtor is relieved from proving a benefit to the creditor in case of:

1. Subrogation of the payer in the creditor's right;

2. ratification by the creditor; or
3. estoppel on the part of the creditor. (par. 2.)

Note:

Estoppel - a legal principle that prevents someone from arguing something or asserting a
right that contradicts what they previously said or agreed to by law.

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

Payment to a third person in possession of credit

This article gives an instance.....

when there is valid payment to a third person

Meaning of "possession" stated under the provision means..

Possession of the credit itself and not merely the document or instrument evidencing the
credit.

Note:

Possession of the instrument (unless transferable by delivery) does not entitle the holder to
payment nor does payment release the debtor
Furthermore, the debtor must act in good faith, that is, in the honest belief that he is making
a valid payment and that the payee is the owner of the credit.
Good faith is presumed.
 Art. 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.
(Real obligation to deliver a specific thing)

In obligation to do or not to do, an act or forbearance cannot be substituted by another act or

forbearance against the obligee's will. (Personal obligation may be negative or positive)

General rule...

Very prestation due must be complied with.

Art. 1245. Dation in payment whereby property is alienated to the creditor in satisfaction of
a debt in money to the creditor in satisfaction of a debt in money shall be governed by the law
of sales.

(4) Four special forms of payment under the Civil code.

1. dation in payment or adjudication or dacion en pago (art. 1245)

conveyance of ownership of a thing as an accepted equivalent of performance.
2. application of payments (art. 1252)
3. payment by cession (art. 1255)
4. tender of payment and consignation (art. 1256-1261)

NOTE in the dation in payment:

If the thing stipulated that it is considered as a full payment; and

If not then the extinguish of the obligation is only to the extent of the value agreed upon.
(conveyance is in effect)

Art. 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.
Art. 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, 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 abeyance.

Meaning of Legal tender.

A currency which if offered by the debtor in the right amount, the creditor must accept in
payment of a debt in money.
Notes and coins issued by BSP.

Legal tenders:

a. 4 cents - P100

b. Peso coins P1 - P1000

c. Notes P20 - P1000 legal tender for all obligations with no limitations

NOTE:

A promissory note can be legal tender (may depend)

Cheque (not a legal tender)
SUBSECTIONS 1-4 - SPECIAL FORMS OF PAYMENT ko
 SECTION 2. - LOSS OF THE THING DUE
A thing is lost when it perishes

SECTION 3. -CONDONATION OR REMISSION OF DEBT

The gratuitous abandonment by the creditor of his right against the
debtor

SECTION 4. - CONFUSION OR MERGER OF RIGHTS

The meeting in one person of the characters of creditor and debtor with
respect to the obligation.

SECTION 5. -COMPENSATION
The extinguishment of the concurrent amount of debts of two persons
who in their own right are creditor and debtor of each other

SECTION 6. - NOVATION

Art. 1291. Obligations may be modified by:

(1) Changing their object or principal conditions;

(2) Substituting the person of the debtor

(3) Subrogating a third person in the rights of the creditor. (1203)

Meaning of Novation

the total or partial extinction of an obligation through the creation of a new one that
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, or
by substituting another in place of the debtor, or
by subrogating a third person in the rights of the creditor

Dual function of novation

Novation is a contract containing, two (2) stipulations:

(1) to extinguish or modify existing obligations
(2) to substitute a new one in its place
NOTE in novation:

It does not operate as an absolute but only as a relative extinction of an obligation which is
only "modified"
Novation is actually a new obligation (or contract) based upon the former one, but
containing one (1) or more material changes.

Kinds of novation.

1. According to origin:
a. Legal- that which takes place by operation of law. (Arts. 1300; see Art 1224);
b. Conventional- that which takes place by agreement of the parties. (Arts. 1300, 1301)
2. According to how it is constituted:
a. Express- when it is so declared in unequivocal terms ((Art. 1292)
b. Implied- when the old and the new obligations are essentially incompatible with each
other. (Ibid)
3. According to extent or effect:
a. Total or extinctive- when the old obligation is completely extinguished; or
b. Partial or modificatory- when the old obligation is merely , i.e., the change is merely
incidental to the main obligation.
4. According to the subject:
a. Real or objective- when the object (or cause) or principal conditions of the obligation are
changed (Art. 1291)
b. Personal or subjective- when the person of the debtor is substituted and/or when a
third person is subrogated in the rights of the creditor
c. Mixed- when the object and/or principal conditions of the obligation and the debtor or
the creditor, or both parties, are changed. It is a combination of real and personal
novations

Art. 1292 In order that the obligation may be extinguished by another which substitutes
the same, it is imperative that it be so declared in unequivocal terms, or that the old and the
new obligations be on every point incompatible with each other.

Requisites of novation

There must be 4 essential requisites.......

1. A previous valid obligation;

2. Capacity and intention of the parties to modify or extinguish the obligation
3. The modification or extinguishment of the obligation; and
4. The creation of a new obligation.

Novation is not presumed

Novation is never presumed.

 It must be clearly and unmistakably 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.
The burden of showing novation is on the party who claims its existence

TITLE II
CONTRACTS

CHAPTER 1
GENERAL PROVISION

Art. 1305. A contract is a meeting of the minds between two persons whereby one binds
himself, with respect to the other, to give something or to render some service (1254a)

Meaning of Contract

Meeting of minds between two contracting parties which takes place when an offer by one
party is accepted by the other:

In a contract...….

one or more person bind himself or themselves with respect to another or others
or reciprocally, to the fulfillment of an obligation to give, to do, or to render service, or to
refrain from doing some particular thing.

Number of parties to a contract

1. There must be at least two persons or parties (because it is impossible for one to contract
with himself)
2. A single person may create a contract by himself by where he represents distinct interests

Contract and obligation distinguished

CONTRACT OBLIGATION

one of the sources of obligations
there can be no contract if there is no
obligation
the legal tie or relation itself that exists
after a contract has been entered into.
An obligation may exists w/out a
contract such as the obligation
imposed by law to pay taxes
Classification of Contract

Contracts may be categorized by the following....

1. According to name or designation:

a. Nominate -that which has specific name or designation in law (commodatum, lease,
agency, sale, etc.); and
b. Innominate (See Art. 1307)-that which has no specific name or designation in law.
i. do ut des- I give that you may give
ii. do ut facias- I give that you may do
iii. facto ut des- I do that you may give
iv. facto ut facias- I do that you may do
2. According to perfection:
a. Consensual; and
b. Real (See Arts. 1315, 1316)
3. According to cause:
a. Onerous; -one the cause of which, for each contracting party is the prestation or promise
of a thing or service by the other
b. Remuneratory or remunerative;- one the cause of which is the service or benefit which is
renumerated (paid for the rendered work) ; and
c. Gratuitous- one the cause of which is the liberality of the benefactor or giver out of pure
generosity (contract of commodatum, pure donation)
4. According to form:
a. Informal, common or simple- or that which can be entered into whatever form provided all
the essential requisites for their validity are present; and
b. Formal or solemn (see Art. 1356)-that which is required by law for its efficacy to be in
certain specified form
5. According to obligatory force:
a. Valid (see Art. 1306)- Those that meet all the legal requisites for the type of agreement
involved and the limitations on contractual stipulation and are therefore, legally binding
and enforceable
b. Rescissible (Chap 6)
c. Voidable (Chap 7)
d. Unenforceable (Chap 8)
e. Void or inexistent (Chap 9)
6. According to person obliged:
a. Unilateral- only one of the party is obliged; and
b. Bilateral (see Art. 1191)- 2 or more parties are obliged
7. According to risks:
a. Commutative (e.g., sale, lease)- when the undertaking of one party is considered the
equivalent of that of the other; and
b. Aleatory (e.g., insurance, sales of hope)- when it depends upon ab uncertain event or
contingency both as to benefit or loss.
8. According to liability:
 a. Unilateral (e.g., commodatum, gratuitous deposit)- when it creates an obligation on the part
of only one of the parties
b. Bilateral (e.g., sale, lease)- when it gives rise to reciprocal obligations for both parties
9. According to status:
a. Executory- when it has not yet been completely performed by both parties; and
b. Executed- when it has been fully and satisfactorily carried out by both parties (see Art.
1403)
10. According to dependence to another contract:
a. Preparatory (e.g., agency, partnership)- when it is entered into as means to an end
(needed for the formation of subsequent contracts)
b. Accessory (e.g., mortgage, guaranty)- when it is dependent upon another contract but is an
indispensable condition for the existence of an accessory contract (existence depends
upon a principal contract)
c. Principal (e.g., sales, lease)- when it does not depend for its existence and validity upon
another contract but is an indispensable condition for the existence of an accessory
contract.(can exists on its own)
11. According to dependence of part of contract to other parts:
a. Indivisible (or entire) (e.g., sale of a dining room table and 8 matching chairs)- when each
part of the contract is dependent upon the other parts for satisfactory performance.
b. Divisible (e.g., sales of a rocking chair and a pair of shoes)- when one part of the contract
may be satisfactorily performed independently of other parts (see Arts.1223-1225)

Art. 1306. The contracting parties may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not contrary to law, morals, good
customs, public order, or public policy. (1255a) (Freedom to stipulate)

Meaning of Valid contracts

Are those that meet all the legal requisites for the type of agreement involved (Art.1318)
and the limitations on contractual stipulation (Art 1306) and are therefore, legally binding
and enforceable

NOTE:

It is possible to have an agreement that meets all the criteria of a valid contract but is
enforceable in a court of law for failure to comply with the Statutes of Frauds (see Art.
1403)

Freedom to contract guaranteed

Every individual has the right to enter into contract, one of the liberties guaranteed by the
Constitution
 Constitutional prohibitions against impairment of contractual obligations refers only to
legally valid contracts

Limitations on contractual stipulations

1. Law
a. it is a fundamental requirement that the contract entered into must bein accordance
with, and not repugnant to, an applicable statute
b. Its terms are embodied in every contract
2. Police Power
a. when there is no law in existence or when the law is silent, the will of the parties prevails
unless their contract contravenes the limitations of morals, good customs, public order,
or public policy.

Contract must not be contrary to ......

law
morals- norms of good and right conduct evolved in a community
good customs-habits and practices which through long usagehave been followed and enforced
by society or some part of it as binding rules of conduct
public order-refers principally to public safety/public weal
public policy- broader than public order, may refer not only to public safety but also to
considerations which are moved by the common good.

Art. 1308. The contract must bind both contracting parties, its validity or compliance
cannot be left to the will of one of them

Persons affected by a contract

Cases when strangers or third persons affected by a contract

Meaning of stipulation pour autrui.

Classes of stipulations pour autrui.

Requisites of stipulation pour autrui.

Art. 1311. Contracts take effect only between the parties, their assigns and heirs, except
in case where the rights and obligations arising from the contract are not transmissible by
their nature, or by stipulation or by provision of law. The heir is not liable beyond the value of
the property he received from the decedent.

If contract should contain some stipulation in favor of a third person, he may demand its
fulfillment provided he communicated his acceptance to the obligor before its revocation. A
mere incidental benefit or interest of a person is not sufficient. The contracting parties must
have clearly and deliberately conferred a favor upon a third person.

Contract must not be contrary to public policy

Art. 1315. Contracts are perfected by mere consent, and from that moment the parties
are bound not only to the fulfillment of what has been expressly stipulated

Art. 1316. The contracting parties may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not contrary to law, morals, good
customs, public order, or public policy. (1255a)

Classification of contracts according to perfection

They are...…

1. Consensual Contract- or that which is perfected by mere consent (e.g., sale, lease, agency) (Art
1315)
2. Real Contract- or that which is perfected by the delivery of the thing subject matter of the
contract (e.g., depositum, pledge, commodatum) (Art 1316;see Arts. 1934, 1963, 2093); and
3. Solemn Contract- or that which requires compliance with certain formalities prescribed by
law, such prescribed form being thereby an essential element thereof (e.g., donation of real
property which must be in a public instrument). (See Art. 1356)

Stages in life of a contract

They are:

1. Preparation or negotiation-the parties have not yet arrived into a definite agreement
2. Perfection or birth- the parties has arrived into a definite agreement or meeting of the minds
regarding the subject matter and cause of a contract
3. Consummation or termination- fulfillment of the contract

How contracts are perfected

1. Consensual contract (C.O.C)

a. General rule: contracts are perfected by mere consent of the parties regarding the
subject matter and the cause of the contract
b. They are obligatory in whatever form they may have been entered into, provided all the
essential requisites for their validity are present.
c. All contracts are consensual as to its perfection.
2. Real contracts ( C.O.C + DELIVERY)
a. the exceptions are the so-called real contracts which are perfected not merely by
consent but by delivery, actual or constructive, of the object of the obligation.
b. These contracts have for their purpose restitution because they contemplate the return
by a party of what has been received from another.
 3. Solemn contracts
a. when the law requires that a contract be in some form is necessary for its perfection.
b. Thus, under the law , a donation of real property cannot be perfected until it is embodied
in a public instrument.

Effect of perfection of the contract

From the moment the parties come to an agreement on definite subject matter and valid
consideration, they are bound not only---------

1. to the fulfillment of what has been expressly stipulated but also;

2. to all the consequences which according to their nature, may be in keeping with good faith,
usage, and law. (Art 1315)

Characteristics of a contract
 CHAPTER 2

ESSENTIAL REQUISITES OF CONTRACTS

General Provisions
 INTRODUCTION

DEFECTIVE CONTRACTS