Obligations: Extinguishment

Obligations

• Obligations and contracts review uses the 2022-2023 syllabus of Atty. Maricris Bathan-Lasco

Extinguishment of Obligations

• Obligations are extinguished by payment or performance and loss of the thing due
• Obligations are extinguished by condonation or remission of the debt and confusion or merger of the rights of creditor and debtor
• Obligations are extinguished by compensation and novation per Art. 1231
• Other causes for obligation extinguishment are annulment, rescission, fulfillment of a resolutory condition, and prescription

Voluntary Extinguishment of Obligations

• Performance is a voluntary way to extinguish obligations

Involuntary Extinguishment of Obligations

• Confusion, death of contracting parties in personal obligations, and loss of the thing due or impossibility of performance are involuntary ways to extinguish obligations
• Extinctive prescription is an involuntary way to extinguish obligations

Payment of Performance

• Payment means not only the delivery of money but also the performance, in any other manner, of an obligation (Art. 1232)
• Payment includes giving a thing (other than money), doing an act, or not doing an act
• “Payment has been made” can refer to delivering something that was promised
• Refraining from doing something is payment or performance if it was an obligation not to do something
• A person pays a pre-existing obligation
• A debt is not understood to have been paid unless the thing or service in which the obligation consists has been completely delivered or rendered (Art. 1233)
• The thing or object of the prestation is delivered, and it is delivered completely (Requisites of Payment)
• Payment must be complete (General Rule)
• Exceptions to payment being complete are substantial performance in good faith (Art. 1234) and creditor accepts the irregular payment or performance (waiver or estoppel) (Art. 1235)
• 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 (Art. 1234)
• If the obligee accepts the performance, knowing its incompleteness or irregularity, and without expressing any protest or objection, the obligation is deemed fully complied with (Art. 1235)
• Requisites for irregular or incomplete performance include obligee accepts the incomplete payment and knows its incompleteness
• Requisites for irregular or incomplete performance also includes obligee did not register his objection

Payment or Performance by a Third Party

• 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 (Art. 1236)
• Whoever pays for another may demand from the debtor what he has paid
• If a payer pays without the knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to the debtor
• 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 (Art. 1237)

Effects of Payment by a Third Person

• With knowledge and consent of debtor payment made by third person entitles payer to full reimbursement and subrogation to the rights of creditor

• Without debtor knowledge or consent payment made by third person entitles payer to only beneficial reimbursement and no subrogation rights

• 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 (Art. 1238)

• Rules on donation apply and the Civil Code on donations states that for a donation to be valid, it must have the consent of the donee or acceptance of the donee

Effects of Payment by a Third Person with Interest

• Regardless of whether it was done with or without the consent of the debtor, full reimbursement + subrogation occurs

• Payment made in obligations to give, must be made by one who has the free disposal of the thing due and capacity to alienate; otherwise payment shall not be valid, without prejudice to the provisions of Article 1427 under the Title on "Natural Obligations." (Art. 1239).

• Free disposal of the thing due means that the thing to be delivered must not be subject to any claim or lien or encumbrance of a third person

• Capacity to alienate means that the person is not incapacitated to enter into contracts (Arts. 1327, 1329) and to make a disposition of the thing due

• For validity of payment, the payee should have both free disposal of the thing and the capacity to alienate

• If person does not have free disposal of the thing due and capacity to alienate it, it is not valid and the thing paid can be recovered

• 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 (Art. 1240)

• If you make payment other than to these persons, then the obligation is not extinguished and the payment is not valid

Payment to Incapacitated Person

• 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 (Art. 1241)

• Payment made to a third person shall also be valid insofar as it has redounded to the benefit of the creditor

• If after the payment, the third person acquires the creditor's rights benefit to the creditor need not be proved

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

• The "possession" refers to possession of the credit itself and not merely of the document or instrument evidencing the credit

• Payer must act in good faith and in the honest belief that he is making a valid payment and that the payee is the owner of the credit

• Payment made to the creditor by the debtor after the latter has been judicially ordered to retain the debt shall not be valid (Art. 1243)

• 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 (Art. 1244)

Dation in Payment

• Dation in payment is where property is alienated to the creditor in satisfaction of a debt in money, and governed by the law of sales (Art. 1245)
• Also means conveyance of ownership of a thing by the debtor to creditor as an accepted equivalent of monetary obligation
• Requisites include performance of the prestation in lieu of payment (animo solvendi) which may consist in the delivery of a corporeal thing or a real right or a credit against a third person
• Requisites include some difference between the prestation due and that which is given in substitution (aliud pro alio) and agreement between the creditor and debtor that the obligation is extinguished by reason of performing a different prestation than that due

Sale v Dacion

• Sale: No pre-existing credit versus Dacion in payment: With pre-existing credit
• Sale: Obligations are created versus Dacion: Obligations are extinguished
• Sale: The cause is the price paid from the viewpoint of the seller, or the acquisition of the thing sold, from the viewpoint of the buyer versus Dacion: The cause is the extinguishment of the debt, from the viewpoint of the debtor, or the acquisition of the object in lieu of the credit, from the viewpoint of the creditor
• Sale: The buyer has still to pay the price versus Dacion: The payment is received before the contract is perfected which is to be charged against the debtor's debt

Meeting Obligations

• When the obligation consists in the delivery of an indeterminate or generic thing, whose quality and circumstances have not been stated, the creditor cannot demand a thing of superior quality (Art. 1246)
• Neither can the debtor deliver a thing of inferior quality
• Unless it is otherwise stipulated, the extrajudicial expenses required by the payment shall be for the account of the debtor, but with regard to judicial costs, the Rules of Court shall govern (Art. 1247)
• Creditor cannot be compelled partially to receive the prestations in which the obligation consists and Debtor may not be required to make partial payments (Art. 1248)
• 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

Payment of Debts in Money

• 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 (Art. 1249)
• The delivery of promissory notes payable to order, or 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

Legal Tender

• Legal tender is that currency which a debtor can legally compel a creditor to accept in payment of a debt in money when tendered by the debtor in the right amount
• All coins and notes issued by the Bangko Sentral ng Pilipinas constitute legal tender for all debts, both public or private
• Coins are legal tender for amounts not exceeding P50.00 for denominations of PO.25 and above, and in amounts not exceeding P20.00, for denominations of P0.10 or less

Extraordinary Inflation or Deflation

• In case of 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 (Art. 1250)
• Extraordinary inflation is a sharp sudden increase of money or credit or both without a corresponding increase in business transactions
• Inflation causes a drop in the value of money, resulting in rise of the general price level
• Extraordinary deflation is the reduction in volume of money or credit, resulting in a decline of the general price level and the opposite of inflation
• Requisites include an official declaration of extraordinary inflation or deflation from the Bangko Sentral ng Pilipinas (BSP) that effects the obligation is contractual in nature and parties expressly agreed to consider the effects of it

Paying Obligations

• Payment shall be made in the place designated in the obligation (Art. 1251)
• In no express stipulation and there is 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 no express stipulation and there is not undertaking is to deliver a determinate thing, 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, then any additional expenses shall be borne by him

Application of Payments

• He who has various debts of the same kind in favor of one and the same creditor, may declare at the time of making the payment, to which of them the same must be applied with limited exceptions (Art. 1252)
• If the debtor accepts from the creditor a receipt in which an application of the payment is made, the former cannot complain of the same, unless there is a cause for invalidating the contract

Debt Payment

• If the debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been covered (Art. 1253)
• When the payment cannot be applied certain circumstances, the debt which is most onerous to the debtor, among those due, shall be deemed to have been satisfied (Art. 1254)
• If the debts due are of the same nature and burden, the payment shall be applied to all of them proportionately

Payment by Cession

• The debtor may cede or assign his property to his creditors in payment of his debts
• This cession, unless there is a stipulation to the contrary, shall only release the debtor from responsibility for the net proceeds of the thing assigned (Art. 1255)
• Requisites include there must be two or more creditors, the debtor must be (partially) insolvent, the assignment must involve all the properties of the debtor and the cession must be accepted by the creditors

Tender of Payment and Consignation

• If the creditor to whom tender of payment has been made refuses without just cause to accept it, the debtor shall be released from responsibility by the consignation of the thing or sum due (Art. 1256)

• Requisites of a valid consignation include tender of payment which is unjustifiably refused unless tender is excused, existence of a valid debt, and prior notice of consignation (before deposit)

• Requisites of a valid consignation includes actual consignation (deposit) and Subsequent notice of consignation

• In order that the consignation of the thing due may release the obligor, it must first be announced to the persons interested in the fulfillment of the obligation

• Consignation shall be ineffectual if it is not made strictly in consonance with the provisions which regulate payment

• Consignation shall be made by depositing the things due at the disposal of judicial authority, before whom the tender of payment shall be proved, in a proper case, and the announcement of the consignation in other cases (Art. 1258)

• The consignation having been made, the interested parties shall also be notified thereof

• The expenses of consignation, when properly made, shall be charged against the creditor (Art. 1259)

• Once the consignation has been duly made, the debtor may ask the judge to order the cancellation of the obligation (Art. 1260)

• Before the creditor has accepted the consignation, or before a judicial declaration that the consignation has been properly made, the debtor may withdraw the thing or the sum deposited, allowing the obligation to remain in force

• If, the consignation having been made, the creditor should authorize the debtor to withdraw the same, he shall lose every preference which he may have over the thing

• The co-debtors, guarantors and sureties shall be released (Art. 1261)

Loss of the Thing Due

• An obligation which consists in the delivery of a determinate thing shall be extinguished if it should be lost or destroyed without the fault of the debtor, and before he has incurred in delay (Art. 1262)
• If there is legal, physical, moral and material impossibility, there was loss
• In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does not extinguish the obligation (Art. 1263)
• 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 (Art. 1264)
• Whenever the thing is lost in the possession of the debtor, it shall be presumed that the loss was due to his fault, unless there is proof to the contrary, and without prejudice to the provisions of article 1165 (Art. 1265)
• The debtor in obligations to do shall also be released when the prestation becomes legally or physically impossible without the fault of the obligor (Art. 1266)

Service Impossibility

• When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be released therefrom, in whole or in part (Art. 1267)
• When the debt of a thing certain and determinate proceeds from a criminal offense, the debtor shall not be exempted from the payment of its price, whatever may be the cause for the loss, unless the thing having been offered by him to the person who should receive it, the latter refused without justification to accept it (Art. 1268)

Extinguishment by Loss

• The obligation having 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 (Art. 1269)

Condonation or Remission of the Debt

• Condonation or remission is essentially gratuitous, and requires the acceptance by the obligor and maybe made expressly or impliedly (Art. 1270)

• The delivery of a private document evidencing a credit, made voluntarily by the creditor to the debtor, implies the renunciation of the action which the former had against the latter (Art. 1271)

• Whenever the private document in which the debt appears is found in the possession of the debtor, it shall be presumed that the creditor delivered it voluntarily, unless the contrary is proved (Art. 1272)

• The renunciation of the principal debt shall extinguish the accessory obligations; but the waiver of the latter shall leave the former in force (Art. 1273)

• It is presumed that the accessory obligation of pledge has been remitted when the thing pledged, after its delivery to the creditor, is found in the possession of the debtor, or of a third person who owns the thing (Art. 1274)

Confusion or Merger of Rights

• The obligation is extinguished from the time the characters of creditor and debtor are merged in the same person (Art. 1275)
• Merger which takes place in the person of the principal debtor or creditor benefits the guarantors but Confusion which takes place in the person of any of the latter does not extinguish the obligation (Art. 1276)
• Confusion in joint obligation does not extinguish a joint obligation except as regards the share corresponding to the creditor or debtor in whom the two characters concur (Art. 1277)

Compensation

• Compensation shall take place when two persons, in their own right, are creditors and debtors of each other (Art. 1278)

• In order that compensation may be proper, several conditions are necessary such as each of the obligors need to bound principally and each must to be a principal creditor of the other (Art. 1279)

• In order that compensation may be proper, the debts must consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated

• In order that compensation may be proper, the debts must be due, liquidated and demandable and over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor

• Notwithstanding the provisions of the preceding article, the guarantor may set up compensation as regards what the creditor may owe the principal debtor (Art. 1280)

• Compensation may be total or partial and when the two debts are of the same amount, there is a total compensation (Art. 1281)

• The parties may agree upon the compensation of debts which are not yet due (Art. 1282)

• If one of the parties to a suit over an obligation has a claim for damages against the other, the former may set it off by proving his right to said damages and the amount thereof (Art. 1283)

• When one or both debts are rescissible or voidable, they may be compensated against each other before they are judicially rescinded or avoided (Art. 1284)

Assignment of Rights made by Creditor

• The debtor who has consented to the assignment of rights made by a creditor in favor of a third person, cannot set up against the assignee the compensation which would pertain to him against the assignor, unless the assignor was notified by the debtor at the time he gave his consent, that he reserved his right to the compensation (Art. 1285)

• If the creditor communicated the cession to him but the debtor did not consent thereto, the latter may set up the compensation of debts previous to the cession, but not of subsequent ones

• If the assignment is made without the knowledge of the debtor, he may set up the compensation of all credits prior to the same and also later ones until he had knowledge of the assignment

• Compensation takes place by operation of law, even though the debts may be payable at different places, but there shall be an indemnity for expenses of exchange or transportation to the place of payment (Art. 1286)

• Compensation shall not be proper when one of the debts arises from a depositum or from the obligations of a depositary or of a bailee in commodatum

• Neither can compensation be set up against a creditor who has a claim for support due by gratuitous title, without prejudice to the provisions of paragraph 2 of Article 301

• Neither shall there be compensation if one of the debts consists in civil liability arising from a penal offense. (Art. 1288)

• If a person should have against him several debts which are susceptible of compensation, the rules on the application of payments shall apply to the order of the compensation Art. 1289

• When all the requisites mentioned in Article 1279 are present, compensation takes effect by operation of law, and extinguishes both debts to the concurrent amount, even though the creditors and debtors are not aware of the compensation (Art. 1290)

Novation

• Obligations may be modified by changing their object or principal conditions, substituting the person of the debtor and subrogating a third person in the rights of the creditor (Art. 1291)
• In order that an 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 (Art. 1292)
• Novation which consists in substituting a new debtor in the place of the original one, may be made even without the knowledge or against the will of the latter, but not without the consent of the creditor with key stipulations, (Art 1293)
• If the substitution is without the knowledge or against the will of the debtor, the new debtor's insolvency or non-fulfillment of the obligations shall not give rise to any liability on the part of the original debtor
• The insolvency of the new debtor, who has been proposed by the original debtor and accepted by the creditor, shall not revive the action of the latter against the original obligor, except when said insolvency was already existing and of public knowledge, or known to the debtor, when the delegated his debt (Art. 1295)

Principal and Accessory Obligations

• When the principal obligation is extinguished in consequence of a novation, accessory obligations may subsist only insofar as they may benefit third persons who did not give their consent. (Art. 1296)
• If the new obligation is void, the original one shall subsist, unless the parties intended that the former relation should be extinguished in any event (Art. 1297)
• The novation is void if the original obligation was void, except when annulment may be claimed only by the debtor or when ratification validates acts which are voidable (Art. 1298)
• If the original obligation was subject to a suspensive or resolutory condition, the new obligation shall be under the same condition, unless it is otherwise stipulated (Art. 1299)
• Subrogation of a third person in the rights of the creditor is either legal or conventional and the former is not presumed, except in cases expressly mentioned in this Code and the latter must be clearly established in order that it may take effect (Art. 1300)
• Conventional and legal subrogation has requirements around third parties and credit depending on preferences (Art. 1301-1304)