CHAPTER 4: EXTINGUISHMENT OF OBLIGATIONS

MODES OF EXTINGUISHMENT OF OBLIGATIONS

1231. Obligations are extinguished: CLASSIFIED
(1) By payment or performance; Voluntary:
(2) By the loss of the thing due;
(3) By the condonation or remission of the debt; 1. Performance:
(4) By the confusion or merger of the rights of a. Payment
creditor and debtor; b. Consignment
(5) By compensation; 2. Substitution:
(6) By novation. a. Dacion en pago (conveyance for
Other causes of extinguishment of obligations, such payment)
as annulment, rescission, fulfi llment of a resolutory b. Novation
condition, and prescription, are governed elsewhere 3. By release agreement:
in this Code. a. Agreement subsequent to the
constitution of the obligation:
CAUSES OF EXTINGUISHMENT OF OBLIGATIONS i. Mutual waiver
ii. Unilateral waiver
1. Death of a party in case the obligation is a
iii. Remission
personal one (Art. 1311, par. 1.)
b. Agreement simultaneous to the
2. Mutual desistance or withdrawal
3. Arrival of resolutory period (Art. 1193, par. 2.) constitution of the obligation:
4. Compromise (Art. 2028.) i. Resolutory
5. Impossibility of fulfillment (Art. 1266.) ii. Extinctive period
6. Happening of a fortuitous event. (Art. 1174.) Involuntary:
OTHER CAUSES OF EXTINGUISHMENT OF OBLI 1. By reason of the subject:
1. Annulment a. Confusion
2. Rescission b. Death of the contracting parties in
3. Fulfillment of a resolutory condition the cases where the obligations are
4. Prescription personal
2. By reason of the object:
1. Loss of the thing due or impossibility
of performance
3. By failure to exercise (right of action):
2. Extinctive prescription
 SECTION 1 – PAYMENT OR PERFORMANCE

1234. If the obligation has been substantially

1232. Payment means not only the delivery of performed in good faith, the obligor may recover as
money but also the performance, in any other though there had been a strict and complete
manner, of an obligation. fulfillment, less damages suffered by the obligee.

PAYMENT may consist of not only in the delivery of

Recovery allowed in case of substantial
money but also the giving of a thing (other than
performance in good faith
money), the doing of an act, or not doing of an act.
“The above rule (Art. 1234.) is adopted from
In law, payment and performance are synonymous.
American Law. Its fairness is evident. In case of
substantial performance, the obligee is benefi ted.
So the obligor should be allowed to recover as if
1233. A debt shall not be understood to have been
there had been a strict and complete fulfi llment
paid unless the thing or service in which the
less damages suffered by the obligee. This last
obligation consists has been completely delivered or
condition affords a just compensation for the
rendered, as the case may be.
relative breach committed by the obligor.”

REQUISITES
WHEN DEBT CONSIDERED PAID
1. There must be substantial performance (when
A DEBT may refer to an obligation to deliver money, the important/essential part of the contract has
to deliver a thing (other than money), to do an act, been performed)
or not to do an act. 2. The obligor must be in good faith. Good faith is
Integrity of the prestation - This requisite means presumed in the absence of proof to the
that the prestation be fulfilled completely. contrary
Partial or irregular performance will not produce the
“subject to further inspection”
extinguishment of an obligation as a general rule.
* hidden defects; customer protection act
Identity of the prestation - the very prestation due
must be delivered or performed. (1235 – previously discussed)

(1248. Unless there is an express stipulation to that 1236. The creditor is not bound to accept payment
effect, the creditor cannot be compelled partially or performance by a third person who has no
to receive the prestations in which the obligation interest in the fulfillment of the obligation, unless
consists. Neither may the debtor be required to there is a stipulation to the contrary.
make partial payments.
Whoever pays for another may demand from the
However, when the debt is in part liquidated and in debtor what he has paid, except that if he paid
part unliquidated, the creditor may demand and the without the knowledge or against the will of the
debtor may effect the payment of the former debtor, he can recover only insofar as the payment
without waiting for the liquidation of the latter.) has been beneficial to the debtor.
 PERSONS FROM WHOM THE CREDITOR MUST 1238. Payment made by a third person who does
ACCEPT PAYMENT not intend to be reimbursed by the debtor is
deemed to be a donation, which requires the
1. The debtor debtor’s consent. But the payment is in any case
2. Any person who has an interest in the obligation valid as to the creditor who has accepted it.
(like a guarantor)
3. A third person who has no interest in the
obligation when there is stipulation that he can Article 1238 “embodies the idea that no one should
make payment be compelled to accept the generosity of another.”
If the paying third person does not intend to be
The creditor should not be compelled to accept reimbursed the payment is deemed a donation
payment from a third person whom he may dislike which requires the debtor’s consent to be valid.
or distrust. The creditor may not, for personal
reasons, desire to have any business dealings with a However, if the creditor accepts the payment, it
third person; or the creditor may not have shall be valid as to him and the payor although the
confidence in the honesty of the third person who debtor did not give his consent to the donation.
might deliver a defective thing or pay with a check
which may not be honored.
How could the creditor be absolutely sure that the 1239. In obligations to give, payment made by one
thing delivered is in accordance with the contract? who does not have the free disposal of the thing due
and capacity to alienate it shall not be valid, without
1237. Whoever pays on behalf of the debtor without prejudice to the provisions of Article 1427 under the
the knowledge or against the will of the latter, Title on “Natural Obligations.’’
cannot compel the creditor to subrogate him in his
rights, such as those arising from a mortgage,
FREE DISPOSAL of the thing due means that the
guaranty, or penalty.
thing to be delivered must not be subject to any
claim or lien or encumbrance of a third person.
RIGHT OF THIRD PERSON TO SUBROGATION
CAPACITY TO ALIENATE means that the person is
Whoever pays on behalf of the debtor is entitled to
not incapacitated to enter into contracts and for
subrogation if the payment is with the consent of
that matter, to make a disposition of the thing due.
the latter.

SUBROGATION REIMBURSEMENT 1240. Payment shall be made to the person in

The person who pays The third person entitled whose favor the obligation has been constituted, or
for the debtor is put by reason of payment has his successor in interest, or any person authorized
into the shoes of the merely the bare right to to receive it.
creditor. be refunded to the extent
The payor acquires provided in the second PAYMENT SHALL BE MADE TO:
paragraph of Article 1236
rights and claims.
without the right to the 1. the creditor or oblige
There is no real guarantees and securities 2. his successor in interest (like an heir or assignee)
extinction of the of the original obligation. 3. any person authorized to receive it
obligation, but only a
change of creditor.
1241. Payment to a person who is incapacitated to • First par. refers to a real obligation to deliver a
administer his property shall be valid if he has kept specific thing. A thing different from that due
the thing delivered, or insofar as the payment has cannot be offered or demanded against the will
been beneficial to him. of the creditor or debtor, as the case may be.
Payment made to a third person shall also be valid • The second paragraph refers to personal
insofar as it has redounded to the benefit of the (positive and negative) obligations. The act to
creditor. Such benefit to the creditor need not be be performed or the act prohibited cannot be
proved in the following cases: substituted against the obligee’s will.

(1) If after the payment, the third person acquires Of course, substitution can be made if the obligee
the creditor’s rights; consents. In facultative obligations, the debtor is
given the right to render another prestation in
(2) If the creditor ratifies the payment to the third
substitution.
person;
(3) If by the creditor’s conduct, the debtor has been
1245. Dation in payment, whereby property is
led to believe that the third person had authority to
alienated to the creditor in satisfaction of a debt in
receive the payment.
money, shall be governed by the law of sales.

Payment to a person incapacitated to administer or

SPECIAL FORMS OF PAYMENT
manage his property is not valid unless such
incapacitated person kept the thing paid or 1. dation in payment (Art. 1245.) Payment in kind
delivered (so that it is not necessary that it should 2. application of payments (Art. 1253.)
have been invested in some profitable venture) or 3. payment by cession (Art. 1255.)
was benefited by the payment. 4. tender of payment and consignation. (Arts.
1256-1261.)
Payment to a third person or wrong party is not valid
except insofar as it has redounded to the benefit of *Strictly speaking, application of payments is not a
the creditor. special form of payment.

WHEN BENEFIT TO CREDITOR NEED NOT BE DATION IN PAYMENT (adjudication or dacion en

PROVED BY DEBTOR pago) is the conveyance of ownership of a thing by
the debtor to creditor as an accepted equivalent of
1. subrogation of the payer in the creditor’s rights performance of a monetary obligation.
2. ratification by the creditor (subsequent
authorization) It is a special form of payment because it is not the
3. estoppel on the part of the creditor ordinary way of extinguishing an obligation. An
existing debt in money is satisfied, not by payment
of money.
1244. The debtor of a thing cannot compel the The law of sales governs because dation in payment
creditor to receive a different one, although the may be considered a specie of sale in which the
latter may be of the same value as, or more valuable amount of the money debt becomes the price of the
than that which is due. thing alienated.
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.
1246. When the obligation consists in the delivery LEGAL TENDER is that currency which a debtor can
of an indeterminate or generic thing, whose quality legally compel a creditor to accept in payment of a
and circumstances have not been stated, the debt in money when tendered by the debtor in the
creditor cannot demand a thing of superior quality. right amount. Monetary obligation.
Neither can the debtor deliver a thing of inferior
* mora accipiendi – if the creditor unjustifiably
quality. The purpose of the obligation and other
refuses the tender of the debtor.
circumstances shall be taken into consideration.

PAYMENT BY MEANS OF INSTRUMENTS OF

1247. Unless it is otherwise stipulated, the CREDITS
extrajudicial expenses required by the payment Right of creditor to refuse or accept. — Promissory
shall be for the account of the debtor. With regard notes, checks, bills of exchange and other
to judicial costs, the Rules of Court shall govern. commercial documents are not legal tender and,
therefore, the creditor cannot be compelled to
accept them.
The extrajudicial expenses of payment are for the
account of the debtor. The reason is that the Effect on obligation. — Payment by means of
obligation is extinguished when payment is made mercantile documents does not extinguish the
and it is, therefore, the debtor who is primarily obligation:
benefited. a. until they have been cashed
JUDICIAL COSTS are the statutory amounts allowed b. unless they have been impaired through the
to a party to an action for his expenses incurred in fault of the creditor. (par.2)
the action. Under the Rules of Court (Sec. 1, Rule
142.), the costs of an action shall, as a rule, be paid
by the losing party. 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
(1248 – previously discussed)
contrary.

INFLATION is a sharp sudden increase of money or

1249. The payment of debts in money shall be made credit or both without a corresponding increase in
in the currency stipulated, and if it is not possible to business transactions.
deliver such currency, then in the currency which is DEFLATION is the reduction in volume and
legal tender in the Philippines. circulation of the available money or credit,
The delivery of promissory notes payable to order, resulting in a decline of the general price level; it is
or bills of exchange or other mercantile documents the opposite of inflation.
shall produce the effect of payment only when they
Under Article 1250, the purchasing value of the
have been cashed, or when through the fault of the
currency at the time of the establishment of the
creditor they have been impaired.
obligation shall be the basis of payment, in case of
In the meantime, the action derived from the any extraordinary increase or decrease in the
original obligation shall be held in abeyance. purchasing power of the currency which the parties
could not have reasonably foreseen. This is,
however, subject to the agreement of the parties to
the contrary. Undiscussed:
Art. 1242 - Payment to third person in possession of
credit. (p. 216)
1251. Payment shall be made in the place
designated in the obligation. Art. 1243 - When payment to creditor not valid.
There being no express stipulation and if the (p. 218)
undertaking is to deliver a determinate thing, the
payment shall be made wherever the thing might be
at the moment the obligation was constituted.
In any other case the place of payment shall be 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.
These provisions are without prejudice to venue
under the Rules of Court.

• If there is a stipulation, the payment shall be

made in the place designated (par. 1; see Art.
1306.)
• If there is no stipulation and the thing to be
delivered is specific, the payment shall be made
at the place where the thing was, at the
perfection of the contract (par. 2.)
• If there is no stipulation and the thing to be
delivered is generic, the place of payment shall
be the domicile of the debtor. (par. 3.)

VENUE is the place where a court suit or action must

be fi led or instituted.

DOMICILE is the place of a person’s habitual

residence. (Art. 50.) Residence is only an element of
domicile. Residence simply requires bodily presence
as an inhabitant in a given place, while domicile (or
legal residence) requires bodily presence in that
place and also an intention to make it one’s
domicile.