Extinguishment of Obligations

• Obligations can be extinguished as per Article 1231 of the Civil Code

Modes of Extinguishing Obligations

• Payment or performance

• Loss of the thing due

• Condonation or remission of the debt

• Confusion or merger of rights between creditor and debtor

• Compensation

• Novation

• Other events that lead to extinguished obligations that are not listed in Article 1231 include: annulment, rescission, fulfillment of a resolutory condition, and prescription

Payment or Performance

• Payment is the delivery of money or the performance of an obligation
• A debt is only considered paid when the obligation is completely delivered or rendered
• Payment should be made to the person the obligation is for, their successor, or someone authorized to receive it
• Special forms of payment include: dation in payment, payment by cession, and tender of payment and consignation

Dation in Payment

• Property is alienated to the creditor to satisfy a debt in money
• Governed by the law of sales

Payment by Cession

• The debtor assigns property to creditors to pay debts
• Unless otherwise agreed, only releases the debtor from responsibility up to the net proceeds of the assigned assets
• Agreements on the effect of cession are governed by special laws

Tender of Payment and Consignation

• If a creditor refuses a valid tender of payment, the debtor can be released from responsibility by consigning the thing or sum due
• Consignation alone has the same effect if the creditor is absent, unknown, incapacitated, refuses to give a receipt without just cause, if two or more persons claim the same right to collect, or if the title of the obligation has been lost

Consignation Requirements

• Consignation of the due item must be announced to parties interested in fulfillment of obligation

• Consignation is ineffectual if not following provisions regulating payment

• Consignation is the act of depositing things due with judicial authority

• Tender of payment should be proven before judicial authority

• Interested parties are to be notified

• Expenses of consignation, when properly made, are charged against the creditor

• Once consignation has been made, the debtor may ask the judge to cancel the obligation

• Before acceptance or judicial declaration, the debtor can withdraw the deposit, reinstating the obligation

• If the creditor allows the debtor to withdraw, the creditor loses preference over the thing, and co-debtors, guarantors, and sureties are released

Tender of Payment Defined

• Debtor offers the creditor the thing or amount due
• Requirements that must be met:
• Must be made in legal tender or lawful currency
• Include any interest due
• Unconditional
• The obligation must already be due

Consignation Defined

• The act of depositing the thing or amount due with the proper court when the creditor does not desire, or refuses to accept payments, or cannot receive it, after complying with legal formalities

Consignation pre-requisites

• Valid debt which is due
• Tender of payment by the debtor and refusal without justifiable cause by the creditor
• Previous notice of consignation to persons interested in fulfilling the obligation
• Consignation of the thing or sum due
• Subsequent notice of consignation made to the interested parties

Loss of the Thing Due

• An obligation to deliver a specific thing is extinguished if the thing is lost or destroyed without the debtor's fault and before delay

• The debtor is responsible for damages, even when the loss of the thing does not extinguish the obligation, if the obligor is liable for fortuitous events by law or stipulation, or if the nature of the obligation requires the assumption of risk

• A thing is considered lost when it perishes, goes out of commerce, disappears such that its existence is unknown, or cannot be recovered

• Loss of a specific or determinate thing will extinguish an obligation to give if it occurs without the debtor's fault, and the debtor is not guilty of delay

Condonation or Remission of Debt

• Condonation or remission is essentially gratuitous and requires acceptance by the obligor

• Can be express or implied and is subject to rules governing inofficious donations

• Express condonation must comply with the forms of donation

• Condonation or remission is a gratuitous abandonment by the creditor of their rights

• Requisites:

• Must be gratuitous

• Must be accepted by the obligor

• Parties must have capacity

• Must not be inofficious

• If express, must comply with the forms of donation

Confusion or Merger

• An obligation is extinguished when the characters of creditor and debtor merge in the same person

• Confusion or merger- Meeting in one person the qualities of the creditor and a debtor with respect to the same obligation.

• Requisites:

  • Must take place between the principal debtor and creditor
  • Must be complete and definite
  • The very obligation involved must be the same or identical

Compensation

• Compensation takes place when two persons, in their own right, are creditors and debtors of each other
• 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

Novation

• Obligations may be modified by:

  • Changing their object or principal conditions
  • Substituting the person of the debtor
  • Subrogating a third person in the rights of the creditor.

• An obligation is extinguished by another which substitutes it, declared unequivocally, or the old and new obligations must be incompatible in every point

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

• Requisites:

  • Existence of a previous valid obligation
  • Intention and capacity of the parties to extinguish or modify the obligation
  • Extinguishment of the obligation
  • Creation or birth of a valid new obligation

Other Modes of Extinguishing Obligations

• Annulment: An invalidation of legal contract. To cancel entirely
• Rescission: Remedy granted by law to contracting parties and third persons to secure reparation of damages caused by a contract, restoring things to their original condition
• Fulfillment of a Resolutory Condition: The happening of the condition extinguishes the obligation
• Prescription: Acquisition or loss of rights by lapse of time