EXTINGUISHMENT

OF OBLIGATION
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 debt
4. By confusion or merger of rights of the
creditor and debtor
5. By compensation
6. By novation
7. Annulment
8. Rescission
9. Fulfillment of resolutory condition
10. Prescription
 I. Payment or Performance

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

Persons who may pay obligation

1. debtor, himself or his legal representative
2. Any third person
GR: Creditor not bound to accept payment or performance by a third person
EXCEPTION: Stipulation to the contrary
To whom payment must
be made
Payment shall be made, as a general rule, to:
1. The person in whose favor the obligation has
been constituted
2. His successor in interest
3. Any person authorized to receive it.

Payment made to unauthorized person is invalid,

EXCEPT:
4. Payment made to a third person provided that
it has redounded to the benefit of the creditor
5. Payment to the possessor of credit provided
that it was made in good faith.
Rule in Monetary
Obligations (1249)
1. Payment shall be made in stipulated
currency.
2. If it is not possible to deliver such
currency, then in the currency which
is legal tender in the Philippines.
3. The delivery of promissory notes
payable to order or bill 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
MEANING OF LEGAL
TENDER

 Legal Tender- refers to such currency which

may be used for the payment of all debts,
whether public or private.
 Under our law, the legal tender of the
Philippines would be all notes and coins
issued by the Bangko Sentral.
 BSP Circular No. 537, series of 2006, the
PHP1, PHP5, and PHP10 coins can be used as
payments for amounts up to PHP1,000.
 coins with lower denominations can be used
as payments for amounts not higher than
PHP100.
Extraordinary inflation or deflation
• In case an extraordinary inflation or deflation of the
currency stipulated should supervene, the value of
the currency at the time of the establishment of
the obligation shall be the basis of payment, unless
there is an agreement to the contrary.
• Extraordinary inflation exists when there is an
unusual decrease in the purchasing power of
currency (that is, beyond the common fluctuation
in the value of currency) and such decrease could
not be reasonably foreseen or was manifestly
beyond the contemplation of the parties at the
time of the obligation. Extraordinary deflation, on
the other hand, involves an inverse situation.
 1. that there was an official declaration
of extraordinary inflation or deflation
from the Bangko Sentral ng Pilipinas
Requisites for (BSP);

extraordinary
inflation or 2. that the obligation was contractual in
nature;
deflation
3. that the parties expressly agreed to
consider the effects of the extraordinary
inflation or deflation.
Place of Payment

If there is no express designation or stipulation in the

obligation with respect to the place where payment shall
be made, the following rules are applicable:
1. If the obligation is to deliver a determinate thing,
the payment shall be made at the place where the
thing might be at the time the obligation was
constituted.
2. In any other case, the payment shall be made at
the domicile of the debtor. If the debtor changes
his domicile in bad faith or after he has incurred in
delay, the additional expenses shall be borne by
him.
Application of Payment
Application of payment- designation of the debt to which the
payment must be applied when the debtor has several
obligations of the same kind in favor of the same creditor.

Requisites
1. There must be only one debtor and only one creditor
2. There must be two or more debts of the same kind;
3. All of the debts must be due;
4. The amount paid by the debtor must not be sufficient
to cover the total amount of all debts.
Legal Application of
Payment (Art. 1254)
When payment cannot be applied in accordance
with 1252 or the application cannot be inferred
from other circumstances, the debt whis is most
onerous to the debtor, among those due, shall
be deemed to have been satisfied.

If the debts due are of the same nature and

burden, the payment shall be applied to all of
them proportionately.
Payment by Cession vs. Dation in
Payment

Cession or assignment –
special form of payment
Dation in payment- as the
whereby the debtor abandons
transmission of ownership of a
all of his property for the
thing by the creditor as
benefit of his creditors in order
accepted equivalent of the
that from the proceeds thereof
performance of obligation.
the latter may obtain payment
of their credits.
Distinguishment of Payment by Cession and Dation
in Payment

Category Payment by Cession Dation in Payment

As to number of parties Plurality of creditors May be only one creditor

As to financial condition of Debtor is in a state of partial Debtor is not necessarily in

parties or relative insolvency a state of financial difficulty

As to object The payment extinguishes Release the debtor for the

the obligation to the extent net proceed of the things
of the value of the thing ceded or assigned.
delivered .
Tender of Payment and Consignation

Consignation- refers to the

Tender of payment-
deposit of the object of the
manifestation made by the
obligation in a competent court
debtor to the creditor of his
in accordance with the rules
decision to comply
prescribed by law after refusal
immediately with his
or inability of the creditor to
obligation.
accept the tender of payment.
Requisites of Consignation
1. That there is a debt due
2. That the consignation has been made either because the creditor to
whom tender of payment was made refused to accept the payment
without just cause, or because any of the causes stated by law for
effective consignation without previous tender of payment exists.
3. The previous notice of the consignation had been given to the
persons interested in the fulfillment of the obligation;
4. That the thing or amount due had been placed at the disposal of
judicial authority.
II. Loss of the Thing Due

Loss of the thing due – means that the thing which constitutes the object of the
obligation perishes or goes out of commerce of man or disappears in such a way that its
existence is unknown, or it cannot be recovered.
III. Condonation or Remission of
the Debt
Remission is act of liberality by virtue of which the oblige, without receiving any price or
equivalent, renounces the enforcement of the obligation, as a result of which it is
extinguished in its entirety or in that part or aspect of the same to which the remission
refers.
Requisites of Condonation or
Remission of the Debt
1. It must be gratuitous ;
2. It must be accepted by the obligor;
3. The obligation must be demandable.
IV. Confusion or Merger of
Rights
Confusion – merger of the characters of creditor and debtor in one and the same person by
virtues of which the obligation is extinguished.
Requisites of Confusion or
Merger of Rights
1. The merger of the characters of the creditor and debtor must be in the same person;
2. That it must take place in the person of wither the principal creditor or principal
debtor;
3. That it must be complete and definite.
V. Compensation
Compensation as mode of extinguishing in their concurrent amount those obligations of
persons who in their own right are creditors and debtors of each other.
Requisite of Compensation
1. That each one of the obligors be bound principally, and the he be at the same time a principal
creditor of the other;
2. That both debts consists in a sum of money, or if the things dues are consumable, they be of
the same kind, and also of the same quality if the latter has been stated;
3. The two debts be dues;
4. That they be liquidated and demandable.
5. That over neither of them there be any retention or controversy, commenced by the third
person and communicated in due time to the creditor.
VI. Novation
Novation is the substitution or change of an obligation by another, resulting in its
extinguishment or modification, either by :
1. changing its object
2. principal conditions
3. by substituting another in place of the debtor
4. subrogating a third person in the rights of the creditor.
Requisites of Novation
1. A previous valid obligation .
2. Agreement of the parties to the new obligation .
3. Extinguishment of the old obligation.
4. Validity of the new obligation.