Extinguishment of Obligations PDF - Law Notes

EXTINGUISHMENT OF OBLIGATIONS Art. 1231, CC. Obligations are extinguished: - 1\. By payment or performance; *Meaning: The obligation is fulfilled because the debtor has done what was required.* *Example: Ana borrows ₱10,000 from Ben and pays him back the full amount on the due...

EXTINGUISHMENT OF OBLIGATIONS Art. 1231, CC. Obligations are extinguished: - 1\. By payment or performance; *Meaning: The obligation is fulfilled because the debtor has done what was required.* *Example: Ana borrows ₱10,000 from Ben and pays him back the full amount on the due date. Her obligation is now extinguished.* - 2\. By the 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. - 7\. Annulment; - 8\. Rescission; - 9\. Fulfillment of a resolutory condition; - 10\. Prescription (NCC, Art. 1231). - 11\. Death -- in obligations which are of purely personal character; - 12\. Arrival of resolutory period; - 13\. Mutual dissent; - 14\. Change of civil status; - 15\. Happening of unforseen events. - It is a concept derived from the principle that since mutual agreement can create a contract, mutual disagreement by the parties can likewise cause its extinguishment (Saura v. Development Bank of the Phils., G.R. No. L-24968, April 27, 1972). PAYMENT OR PERFORMANCE ====================== **Payment** is the fulfillment of the obligation by the realization of the purposes for which it was constituted(Jurado,2010). ***Meaning: Payment means completing an obligation by achieving its intended purpose. It is not just about giving money---it is about fulfilling what was agreed upon in the contract.*** ***Breaking It Down:*** - *If the obligation is to **pay money**, then payment means **giving the agreed amount**.* - *If the obligation is to **deliver something**, then payment means **handing over that thing**.* - *If the obligation is to **do a service**, then payment means **performing that service as promised**.* ***Example:** Juan borrows ₱5,000 from Maria and agrees to pay it back in one month. When Juan pays Maria the full amount on time, he fulfills his obligation.* *Explanation: The purpose of the loan agreement was for Juan to repay the money. Since he did, his obligation is considered paid.* [Payment may consist not only in the delivery of money but also the giving of a thing (other than money), the doing of an act, or not doing of an act (NCC, Art. 1232).] Characteristics of payment -------------------------- 1. Integrity -- The payment of the obligation must be completely made; 2. Identity -- The payment of the obligation must consist the performance of the very thing due; 3. Indivisibility -- The payment of the obligation must be in its entirety. Integrity --------- [GR: Payment or performance must be complete (NCC, Art. 1233).] ***Explained Simply*** ***General Rule (GR):** **Payment or performance must be complete.**\ 🔹 This means that a person must **fully** fulfill their obligation whether it's paying money, delivering goods, or doing a service **exactly as agreed.*** ***Example:** If Pedro promises to pay Juan **₱10,000**, he must pay the full amount for the obligation to be considered complete.* [XPNs:] 1. [Substantial performance performed in good faith (NCC, Art. 1234);] ***Meaning:** If someone **almost** fulfills the obligation and they **tried their best** (acted in good faith), the court may still consider it as completed.* ***Example:** A contractor builds a house but forgets to install one light fixture. Since the house is **mostly complete** and the mistake was not intentional, it is considered **substantial performance** and the obligation is still valid.* 2. [When the obligee accepts the performance, knowing its incompleteness or irregularity and without expressing any protest or objection; (NCC, Art. 1235); or] ***Meaning:** If the person owed (creditor) **knows** the performance is incomplete but **accepts it anyway** without protesting, then the obligation is considered fulfilled.* ***Example:** A painter is hired to paint an entire house but misses a small area. The owner **sees the mistake but still pays the full amount without complaint**. Since the owner accepted the work, the obligation is considered settled.* 3. [Debt is partly liquidated and partly unliquidated, but the liquidated part of the debt must be paid in full.] ***Meaning:** If part of a debt is **certain and clear (liquidated)** and part is still **unclear (unliquidated)**, the **clear** part must still be paid in full.* ***Example:** A customer owes a supplier ₱10,000 for past deliveries and another ₱5,000 for future orders still being processed. The ₱10,000 is **clear and due**, while the ₱5,000 is **not yet final**. The customer must pay the ₱10,000 immediately.* Substantial Performance Doctrine -------------------------------- [It provides the rule that if a good-faith attempt to perform does not precisely meet the terms of an agreement or statutory requirements, the performance will still be considered complete if the essential purpose is accomplished (Black's Law Dictionary, 2009).] ***Meaning:** This rule says that "if someone makes an honest effort to fulfill an obligation but doesn't follow it perfectly, their performance can still be considered complete---" as long as the main goal of the agreement is met.* *Even if there are small mistakes or slight deviations, the obligation is not automatically invalid, especially if the error is minor and does not affect the overall purpose.* ***Example:** A builder is contracted to construct a house with white tiles, but due to a supplier issue, they use off-white tiles instead.* *Explanation: The main purpose of the contract was to build a house. Since the builder completed it and the mistake (tile color) is minor and does not affect the house's function, it is still considered substantial performance.* 1. [Attempt in good-faith to comply with obligation;] *(meaning they sincerely tried to do what was required).* 2. [Slight deviation from the obligation;] *(it should not be a major failure).* [and the omission or defect of the performance is technical and unimportant; and does not pervade the whole, or is not material that the object which the parties intended to accomplish is not attained] *(the mistake should not make the entire obligation useless)* (Tolentino, 2002). Identity of the thing --------------------- [GR:] Thing paid must be the very thing due and cannot be another thing even if of the same or more quality and value. ***Explained Simply*** ***General Rule:** When you owe someone something, you must **give or do exactly what was agreed upon**---you cannot replace it with something else, even if the replacement is **better or more valuable**.* [XPNs: *(When Substitution is Allowed*]*)* 2. [Novation of the obligation; and] ***Meaning:** The creditor and debtor **agree to change the original obligation** to a new one.\ **Example:** Ana was supposed to deliver rice, but the buyer **agrees to accept corn** instead*[.] 3. Obligation is facultative. [NOTE:] In an obligation to do or not to do, an act or forbearance cannot be substituted by another act or forbearance against the obligee's will. Indivisibility -------------- [GR:] Debtor cannot be compelled by the creditor to perform obligation in parts and neither can the debtor compel the creditor to accept obligation in parts. *Explained Simply* ------------------ *General Rule:* --------------- - *The debtor cannot pay or perform the obligation in parts unless the creditor agrees.* -------------------------------------------------------------------------------------- - *The creditor cannot force the debtor to make a partial payment or partial performance.* ---------------------------------------------------------------------------------------- *In short: The obligation must be completed as a whole, not broken into smaller parts.* --------------------------------------------------------------------------------------- XPNs : When: 1. Partial performance has been agreed upon; ***Meaning:** If both the **debtor and creditor agree**, the obligation can be performed **in parts** instead of all at once.* ***Example:** Maria hires a painter for **₱30,000** to paint her entire house. They agree that the painter will first do the exterior for **₱15,000**, and the interior later for another **₱15,000**.* 2. Part of the obligation is liquidated and part is unliquidated; or ***Meaning:** If part of the debt is **fixed and certain (liquidated)** and the other part is **unclear or disputed (unliquidated)**, the debtor **must pay the clear part first**.* ***Example:*** - *Juan owes Pedro **₱20,000** for a delivered product (liquidated) and another **₱10,000** for an item still being priced (unliquidated).* - *Since **₱20,000 is certain**, Juan must pay that amount even if the other ₱10,000 is still being finalized.* 3. To require the debtor to perform in full is impractical. ***Meaning:** If requiring the debtor to **fully perform** the obligation at once is **impossible or impractical**, partial performance may be accepted.* ***Example:** A supplier agrees to deliver **1,000 bags of cement**, but a typhoon causes road closures. Since delivering everything at once is **not possible**, the supplier delivers **500 bags now** and the rest later.* their prior demand for full payment. ***Accepting Partial Payment Does NOT Mean Giving Up the Right to Full Payment*** To imply that creditors accept partial payment as complete performance of their obligation, their acceptance must be made under circumstances that indicate their intention to consider the performance complete and to renounce their claim arising from the defect. ***Explained Simply:*** ***When Does Partial Payment NOT Mean Full Payment?*** - *If a creditor accepts a part of the payment, it is not automatic that they are satisfied with it.* - *They can still demand the rest of what is owed unless they clearly say otherwise.* ***Example:*** - *Luis lends Pedro ₱50,000. Pedro only pays ₱30,000, and Luis accepts it.* - *Luis can still ask for the remaining ₱20,000, unless he explicitly agrees that the ₱30,000 is enough to settle the debt* ***When Does Partial Payment Mean Full Payment?*** - *For a creditor to consider partial payment as **complete settlement**, they must **clearly show** they are giving up their right to collect the rest.* ***Example:*** - *A store sells a TV for **₱10,000**, but the buyer only pays **₱8,000**.* - *If the store owner **writes a receipt stating** that the **₱8,000 fully settles the balance**, they **cannot** demand the remaining ₱2,000 later.* [NOTE: While Art. 1248 of the Civil Code states that creditors cannot be compelled to accept partial payments, it does not prohibit them from accepting such payments (Selegna Management and Development Corp. v. UCPB, G.R. No. 165662, May 3, 2006).] ***Explained Simply:*** ***Creditors Cannot Be Forced to Accept Partial Payments, But They Can Choose To*** ***Main Rule (Article 1248, Civil Code):*** - *A **creditor cannot be forced** to accept a **partial payment** from a debtor.* - *However, if the **creditor willingly accepts** a partial payment, it is **allowed**.* ***What This Means:*** - *A **debtor cannot insist** on paying only part of their debt if the creditor wants full payment.* - *But if the **creditor agrees** to accept a partial payment, the law **does not forbid it**.* ***Example 1 (Creditor Refuses Partial Payment):*** - *Anna owes a bank **₱100,000**. She tries to pay **₱50,000** first, but the bank **refuses** because they want the full amount.* - *The bank **has the right** to reject partial payment and demand full payment instead.* ***Example 2 (Creditor Accepts Partial Payment):*** - *Ben owes Carlo **₱20,000**. He only has **₱10,000** for now.* - *Carlo **chooses to accept** the ₱10,000 and allows Ben to pay the rest later.* - *Since Carlo agreed, the partial payment is valid.* Requisites of a valid payment ----------------------------- *Explained Simply* ------------------ *For a payment to be valid and legally recognized, it must meet the following five conditions:* ----------------------------------------------------------------------------------------------- 1. [The person who pays the debt must be the debtor;] ***Meaning:*** - *The **person who owes the debt** should be the one making the payment.* - *However, someone else **can pay on behalf of the debtor** if allowed.* ***Example:*** - *Juan borrowed **₱5,000** from Maria. **Juan** must be the one to pay Maria.* - *But if Juan's friend, Pedro, **pays for him**, the payment is valid **only if Maria accepts it**.* 2. [The person to whom payment is made must be the creditor;] ***Meaning:*** - *The **payment should be made to the person who is supposed to receive it** (the creditor).* - *Payment to the **wrong person** may not count.* ***Example:*** - *Anna owes **₱10,000** to Ben. She must **pay Ben directly** or someone legally authorized by Ben (like his lawyer).* - *If she mistakenly pays a **random person**, the debt is **not settled**.* 3. [The thing to be paid or to be delivered must be the precise thing or the thing required to be delivered by the creditor;] ***Meaning:*** - *The **debtor must pay exactly what was agreed upon**---not something different.* - *Even if the replacement is of the **same or greater value**, the creditor **does not have to accept it**.* ***Example:*** - *Carlos sells a **blue bicycle** to David for **₱8,000**.* - *David cannot give Carlos a **red bicycle** instead, even if it's worth more.* - *Carlos has the right to **demand the blue bicycle** or refuse payment* 4. [The manner (if expreslly agreed upon), time, and place of payment, etc.; and] ***Meaning:*** - *If the agreement specifies **how, when, or where** payment should be made, it **must be followed**.* ***Example:*** - *Mark rents an apartment and must **pay ₱15,000 every 1st of the month via bank transfer**.* - *If Mark tries to pay **₱15,000 in cash on the 10th**, the landlord **can refuse** because he did not follow the agreement.* 5. [Acceptance by the creditor.] *Meaning:* - *The **creditor must receive** and accept the payment for it to be valid.* ***Example:*** - *Sophia owes Leo **₱3,000**.* - *If Leo **refuses to accept** the money without a valid reason, Sophia may **deposit the money in court** as proof that she tried to pay.* Kinds of payment ---------------- 1. [Normal - When the debtor voluntarily performs the prestation stipulated;] ***Explained Simply:*** ***Normal Payment (Voluntary Payment)*** - *The **debtor pays willingly** as agreed.* - *This is the **usual way** debts and obligations are settled.* ***Example:*** - *Mark borrows **₱10,000** from Anna and **pays on time** as promised.* 2. Abnormal - When he is forced by means of a judicial proceeding, either to comply with the prestation or to pay the indemnity (Tolentino, 1991). ***Explained Simply:*** ***Abnormal Payment (Forced Payment)*** - *The debtor **refuses or fails to pay**, so the creditor **files a case in court**.* - *The court **orders the debtor** to pay or provide compensation.* ***Example:*** - *Jane refuses to pay **₱15,000** she owes to Chris.* - *Chris **sues Jane**, and the court **forces her** to pay.* [**Person who pays** The following persons may effect payment and compel the creditor to accept the payment: (*These people **can pay a debt** and **force the creditor to accept it**.)*] 1. Debtor himself; *The person who **owes the debt** should pay it.* ***Example:*** *Luis borrows **₱5,000** from Maria. Luis **must pay** Maria directly*. 2. His heirs and assigns; 3. His agents and representatives; or ***Example:*** 4. Third persons who have a material interest in the fulfilment of the obligation (\[NCC, Art. 1236 (1)\]. *Someone **who benefits from the payment** can settle the debt.* ***Example:*** *A **co-maker on a loan** (a guarantor) pays the bank if the main borrower fails to pay.* PAYMENT MADE BY THIRD PERSONS GR: The creditor is not bound to accept payment or performance by a third person. ***Explained Simply:*** ***General Rule (GR):*** ***Only the debtor** (the person who owes the obligation) is required to pay.* *The creditor **is not obligated** to accept payment from someone else.* ***Example:*** *Anna owes **₱10,000** to Ben. Ben **can refuse** payment from Anna's friend, Carla, because Carla is **not the debtor**.* XPNs: 1. When made by a third person who has interest in the fulfillment of the obligation; and *If someone else **will be affected** by the debt, they **can pay** and the creditor **must accept** it.* 2. Contrary stipulation (NCC, Art. 1236). *If the debtor and creditor **agreed beforehand** that a third party **can pay**, the creditor **must accept** the payment.* ***Example:*** *Maria takes out a **loan** and signs a contract stating that **her brother can pay for her**.* *The lender **cannot refuse** payment from Maria's brother.* NOTE: The rules on payment by a third person (NCC, Article. 1236 to 1238) cannot be applied to the case of a third person who pays the redemption price in sales with right of repurchase. This is so because the vendor a retro is not a debtor within the meaning of the law (Jurado, 2010). ***Example:*** Rights of a third person who made the payment --------------------------------------------- *Explained Simply* ------------------ 1. [If the payment was made with knowledge and consent of the debtor:] a. Can recover entire amount paid (absolute reimbursement); or (*Full Reimbursement (Absolute Reimbursement)* *The third person can **ask the debtor to pay back** the full amount they paid.* ***Example:*** *Jake owes **₱10,000** to Lisa.* *Jake asks his friend Paul to pay Lisa for him.* *Since Jake **agreed**, Paul can ask Jake to **fully reimburse him**.* b. Can be subrogated to all rights of the creditor*. (Step Into the Creditor's Shoes\_\_Subrogation)* *The third person can take over **all the creditor's rights**.* *This means they can **demand payment** from the debtor **just like the original creditor** would.* ***Example:*** *Carla owes **₱50,000** to a bank.* *Her uncle pays the debt **with her permission**.* *The uncle now **has the same rights as the bank** and can **demand repayment** from Carla.* 2. [If the payment was made without knowledge or against the will of the debtor -- Can recover only insofar as payment has been beneficial to the debtor (right of conditional reimbursement)]. *The third person **can still ask for reimbursement**, but **only** for the amount that actually **helped the debtor**.* ***Example:*** *Mark owes **₱20,000** to John.* *Without telling Mark, his friend Peter pays **₱15,000** to John.* *Later, it turns out Mark **only really owed ₱10,000** after deductions.* *Peter can **only ask Mark to repay ₱10,000** (not the full ₱15,000).* NOTE: 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 (NCC, Art. 1238). ***Explained Simply:*** ***If the Third Person Paid as a Gift (Donation)*** *If the third person **didn't want to be paid back**, their payment is considered a **gift (donation)**.* *However, for the donation to be **official**, the debtor **must accept it**.* *Either way, the **creditor still gets their payment**.* ***Example:*** *Mia owes **₱5,000** to a store.* *Her father **secretly pays** the store without asking for reimbursement.* *The store **accepts the payment**, and Mia's debt is cleared.* *But if Mia does **not accept** the donation, legally, it is not a formal gift.* Person to whom payment is made ------------------------------ *When making a payment, the debtor must ensure they give it to the right person---otherwise, the debt might not be considered paid.* ------------------------------------------------------------------------------------------------------------------------------------ [Persons entitled to receive the payment:] 1. The person in whose favor the obligation has been constituted; *This is the person **the debtor originally owes** money or a service to.* ***Example:*** - *Ben borrows **₱5,000** from Anna.* - *Ben **must** pay Anna directly.* 2. His successor in interest; or - *If the creditor **dies or transfers their right** to someone else, the **new person** can receive the payment.* ***Example:*** - *Anna passes away, and her son, Carl, inherits all her assets and debts.* - *Ben must **now pay Carl**, since he is the **new owner** of the debt.* 3. Any person authorized to receive it (NCC, Art. 1240). ***Example (Formal Authorization):*** - *Anna tells Ben to **pay her lawyer instead**.* - *Since the lawyer is **authorized**, the payment is valid.* ***Example (Apparent Authority):*** - *Ben visits Anna's store to pay his debt.* - *Anna's assistant **accepts the payment**.* - *Since the assistant is working for Anna, the payment is **still valid**.* NOTE: Payment made to one having apparent authority to receive the money will, as a rule, be treated as though actual authority had been given for its receipt. Likewise, if payment is made to one who by law is authorized to act for the creditor, it will work a discharge (Sps. Miniano v. Concepcion, G.R. No. 172825, October 11, 2012). ***Example:*** - *A court **appoints a guardian** to collect money for a minor.* - *If someone pays the **guardian**, the debt is considered **settled**.* Payment to an unauthorized person --------------------------------- GR: Payment to an unauthorized person is not a valid payment (NCC, Art. 1241). ***Explained Simply:*** ***When It Can Still Be Valid?*** ***General rule** is that you must pay the **right person** (creditor, heir, or authorized representative). If you pay **someone else** by mistake, the payment is usually **not valid**.* XPNs: 1. Payment to an incapacitated person *(Like a Minor or Someone Mentally Unfit)* if: ***Explained Simply:*** *Normally, you **should not** pay someone who **cannot legally handle money**, like a **child** or a person declared **mentally incapable**. But if:* a. [He kept the thing delivered] (***They kept what was given** (didn't return it)*; or b. [It has been beneficial to him] (***They benefited from it** (e.g., used the money for food or shelter)*, (NCC, Art. 1241); *Then the payment **may still be valid**.* ***Example:*** - *Ben owes ₱1,000 to Leo, but **accidentally pays Leo's 14-year-old son**.* - *If the son **buys groceries for Leo**, the payment **is still valid** because it benefited Leo.* 2. [Payment to a third person insofar as it redounded to the benefit of the creditor; and Benefit to the creditor need not be proved:] (RRE) ***Explained Simply:*** *If a debtor mistakenly **pays a third person**, but the **creditor actually benefits**, the payment **may still count**.* ***Example:*** - *Mike owes ₱5,000 to Carla but **accidentally pays Carla's assistant, Anna**.* - *If Anna uses the money **to pay Carla's bills**, Carla **still benefits**, so the payment is valid.* c. [If after the payment, the third person acquires the creditor's Rights]; *(**The third person later gets the creditor's rights** (e.g., through legal transfer).* d. [If the creditor Ratifies the payment to the third person]; (***The creditor confirms the payment** afterward*;) or e. [If by the creditor's conduct, the debtor has been led to believe that the third person had authority to receive the payment (Estoppel) (NCC, Art. 1241).] *(**The creditor\'s actions made the debtor believe** the third person had the right to collect (estoppel).* 3. [Payment in good faith to the possessor of credit (NCC, Art. 1242).] ***Explained Simply:*** *If the debtor **honestly** and **reasonably** believes the person **has the right to accept payment**, then the payment might still be valid.* ***Example:*** - *Carla tells Mike that Anna **can collect payments** for her.* - *Later, Carla denies it, but since **Mike acted in good faith**, the payment may still be valid.* NOTE: [Payment made to the creditor by the debtor after the latter has been judicially ordered to retain the debt shall not be valid. (NCC, Art. 1243).] ***Explained Simply:*** ***Example:*** - - - SPECIAL FORMS OF PAYMENT ======================== [The delivery and transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of the obligation. The property given may consist not only of a thing but also of a real right (Tolentino, 2002)] ***Explained Simply:*** *Dation in payment happens when a debtor gives something else instead of money to settle a debt, and the creditor accepts it as full payment. This can be property, assets, or rights instead of cash.* ***Example:*** - *Mark **owes ₱500,000** to Lisa but doesn't have cash to pay.* - *Instead, he **gives Lisa his car**, and she **agrees to accept it** as full payment.* - *The debt is **considered paid** because Lisa accepted the car as an equivalent of cash.* 1. [There must be a 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 the third person;] ***Meaning: The debtor must give something instead of money to pay the debt.*** - *Instead of paying in **cash**, the debtor **delivers property, rights, or even a claim against another person**.* - *The debtor must intend for this **to serve as payment** (animo solvendi).* ***Example:*** - *Maria owes ₱200,000 but gives **her land title** to the creditor instead of cash.* 2. [There must be some difference between the prestation due and that which is given in substitution (aliud pro alio); and] ***Meaning: What is given as payment must be different from what was originally owed.*** - *The replacement **cannot be the same thing** originally agreed upon.* - *It must be **a different asset** (aliud pro alio).* ***Example:*** - *If John was supposed to pay **money** but instead **gives a car**, this condition is met.* - *If John was supposed to give **a laptop** but instead **gives a different laptop**, this **may not** qualify as dation in payment.* 3. [There must be an agreement between the creditor and debtor that the obligation is immediately extinguished by reason of the performance of a prestation different from that due] (Caltex Philippines, Inc. v. IAC, G.R. No. 72703, November 13, 1992). ***Meaning:** The creditor must agree that the debt is fully paid by accepting the substitute.* - *The creditor must formally accept the new payment method.* - *Once accepted, the debt is immediately considered settled.* ***Example:*** - *Ana owes ₱500,000 to Mark.* - *She offers her house instead of cash.* - *Mark agrees and considers the debt fully paid.* [Assignment of credit] ---------------------------------- [An agreement by virtue of which the owner of a credit, known as the assignor, by a legal cause, such as sale, dation in payment, exchange or donation, and without the consent of the debtor, transfers his credit and accessory rights to another, known as the assignee. The assignee acquires the power to enforce it to the same extent as the assignor could enforce it against the debtor. It may be in the form of a sale, but at times it may constitute a dation in payment, such as when a debtor, in order to obtain a release from his debt, assigns to his creditor a credit he has against a third person. As a dation in payment, the assignment of credit operates as a mode of extinguishing the obligation; the delivery and transmission of ownership of a thing (in this case, the credit due from a third person) by the debtor to the creditor is accepted as the equivalent of the performance of the obligation.] ***Explained Simply:*** ***Assignment of credit** happens when a person who is owed money (the **assignor**) **transfers their right to collect the debt** to another person (the **assignee**) without needing the debtor's consent. The assignee can then collect the debt **just like** the original creditor could.* ***How It Works:*** ***A creditor (assignor) transfers their right to collect a debt to someone else (assignee).**\ **The debtor still owes the same debt, but now to the assignee instead of the original creditor.**\ **The transfer can happen through** sale, dation in payment, exchange, or donation.* ***Example:*** - *Anna **lent ₱50,000** to Ben, meaning Ben owes her money.* - *Anna needs cash immediately, so she **sells Ben's debt to Carla** for **₱45,000**.* - *Now, **Ben must pay Carla instead of Anna**.* - ***Carla can collect from Ben just like Anna could.*** ***When Used as Payment (Dation in Payment):*** *Sometimes, instead of selling the debt, a person **uses it to pay their own debt**.* ***Example:*** - *Mark **owes ₱100,000** to Lisa.* - *Mark is also **owed ₱100,000** by John.* - *Mark **assigns John's debt** to Lisa instead of paying in cash.* - *Now, John **must pay Lisa**, and Mark's debt is **considered paid**.* FORM OF PAYMENT 1. Payment in cash -- [all monetary obligations shall be settled in Philippine currency. However, the parties may agree that the obligation be settled in another currency at the time of payment (R.A. 8183, Sec. 1).] ***Meaning:** The law says that all debts must be paid using Philippine pesos.* *However, the debtor and creditor can agree to use a different currency when making the payment.* ***Example:*** - *Carlos owes Maria **₱10,000**.* - *He must pay in pesos unless Maria **agrees** to accept US dollars instead.* 2. Payment in check or other negotiable instrument -- [not considered payment, they are not considered legal tender and may be refused by the creditor except when:] ***Meaning:** A check (or similar document) is NOT real payment because it is not cash.* a. [the document has been encashed] *(If the check has already been cashed (encashed)*; or b. [it has been impaired through the fault of the creditor] *(If the check was lost or damaged due to the creditor's fault.* (NCC, Art. 1249). ***Example:*** - *David gives Lisa a **₱5,000 check** to pay his debt.* - *Lisa **can reject the check** and demand cash instead.* - *But if she **already cashed it**, the debt is considered **paid**.* PAYMENT IN CASH =============== [Legal tender] -------------------------- [Legal tender means such currency which in a given jurisdiction can be used for the payment of debts, public and private, and which cannot be refused by the creditor (Tolentino, 2002).] [The legal tender covers all notes and coins issued by the Bangko Sentral ng Pilipinas and guaranteed by the Republic of the Philippines. The amount of coins that may be accepted as legal tender are:] ***Meaning:*** *Legal tender refers to money that must be accepted for payments by law.* *In the Philippines, all paper bills and coins issued by Bangko Sentral ng Pilipinas (BSP) are legal tender.* 1. [One-Peso, Five-Pesos, 10-Pesos coins in amount not exceeding P1,000.00] 2. [25 centavos or less -- in amount not exceeding P100. 00 (BSP Circular No. 537, Series of 2006, July 18, 2006).] PAYMENT BY NEGOTIABLE INSTRUMENT ================================ [Rule on tender payment as to checks] ------------------------------------------------- [Q:] When does payment by a negotiable instrument produce the effect of payment? [A:] (1) Only when it is cashed, or \(2) when through the fault of the creditor, they have been impaired \[NCC, Art. 1249 (2)\]. [A check does not constitute a legal tender, thus a creditor may validly refuse it. However, this does not prevent a creditor from accepting a check as payment -- the creditor has the option and the discretion of refusing or accepting it (Far East Bank & Trust Company v. Diaz Realty, Inc., G.R. No. 138588, August 23, 2001).] APPLICATION OF PAYMENTS ======================= [It is the 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 (NCC, Art. 1252).] ***Meaning:** When a debtor owes **multiple debts** of the **same kind** to the **same creditor**, the debtor has the right to **choose which debt** their payment will be applied to.* [Requisites:] 1. [There is only one debtor and creditor; *(*]***Same Debtor & Same Creditor** -- There is only **one person who owes money** and **one person to be paid**.)* 2. [The debtor owes the creditor two or more debts]; *(**Multiple Debts Owed** -- The debtor has at least **two or more debts** with the same creditor.)* 3. [Debts are of the same kind or identical nature; e.g. both debts are money obligations obtained on different dates;] *(**Same Type of Debt** -- The debts must be of the **same kind**, such as **loans** or **money obligations** (but obtained at different times).* 4. [All debts are due and demandable, except]: a. [When there is mutual agreement between the parties] (Tolentino, 2002); b. [The application is made by the party for whose benefit the term has been constituted] \[NCC, Art. 1252(1\]). *(The debtor has the right to choose which debt to pay first (if a payment term was given for the debtor's benefit).* 5. [The payment made is not sufficient to cover all obligations. Right of the debtor in the application of payments]. GR: [The law grants the debtor a preferential right to choose the debt to which his payment is to be applied. But the right of the debtor is not absolute; he cannot impair the rights granted by law to the creditor] (Tolentino, 2002). ***Meaning:** The debtor has the first right to decide which debt their payment will go to.* XPN: [Debtor's failure to ascertain which debt his payment is to be applied. -- The right of the debtor to choose to which debt his payment will be applied against may be transferred to the creditor when he fails to make the application and subsequently he accepts a receipt from the creditor] [evidencing the latter's choice of application. Under this circumstance, the debtor cannot complain of the application made by the creditor unless there be a cause for invalidating such act.] [As far as the debtor is concerned, the right to make an application of payment must be exercised at the time payment is made] (Bachrach Garage and Taxicab Co., v. Golingco, G.R. No. 13761, July 12, 1919). ***Meaning:*** *If the debtor does not specify where the payment should go, the creditor gets to choose.* *If the debtor accepts a receipt showing how the creditor applied the payment, they cannot later complain about it.* *The debtor must decide at the time of payment---otherwise, the creditor\'s decision applies.* 6. [All debts are due and demandable, except]: c. [When there is mutual agreement between the parties] (Tolentino, 2002); d. [The application is made by the party for whose benefit the term has been constituted] \[NCC, Art. 1252(1\]). 7. [The payment made is not sufficient to cover all obligations. Right of the debtor in the application of payments.] GR: [The law grants the debtor a preferential right to choose the debt to which his payment is to be applied. But the right of the debtor is not absolute; he cannot impair the rights granted by law to the creditor] (Tolentino, 2002). XPN: [Debtor's failure to ascertain which debt his payment is to be applied. -- The right of the debtor to choose to which debt his payment will be applied against may be transferred to the creditor when he fails to make the application and subsequently he accepts a receipt from the creditor] [evidencing the latter's choice of application. Under this circumstance, the debtor cannot complain of the application made by the creditor unless there be a cause for invalidating such act.] [As far as the debtor is concerned, the right to make an application of payment must be exercised at the time payment is made] (Bachrach Garage and Taxicab Co., v. Golingco, G.R. No. 13761, July 12, 1919). ***Meaning:*** ***What Happens When Payment Is Not Enough to Cover All Debts?*** - *If the **debtor has multiple debts** but **not enough money** to pay them all, they **must choose** which debt they are paying.* - *This **right is not absolute**---the debtor **cannot abuse it** to harm the creditor's rights.* ***What If the Debtor Fails to Choose?*** ***Exception to the Rule:*** - *If the **debtor does not specify** which debt they are paying, the **creditor can decide** instead.* - *If the **debtor accepts a receipt** from the creditor showing which debt was paid, they **cannot complain later**.* [Limitation upon right to apply payment] ---------------------------------------------------- [If the debt produces interests, payment of the principal shall not be deemed to have been made until the interest have been covered] (NCC, Art. 1253). ***Interest Must Be Paid First!*** - *If your debt has **interest**, your payment **first goes to the interest** before reducing the actual amount you borrowed (**the principal**).* - ***Exception:** If you and the creditor **agree otherwise**, you can pay the principal first.* NOTE: [This applies only in the absence of a verbal or written agreement to the contrary; in other words, it is merely directory, and not mandatory] (Magdalena Estates, Inc. v. Rodriguez, G.R. No. L18411, December 17, 1966). [Legal application of payment] ------------------------------------------ [If both the creditor and the debtor failed to exercise the right of application of payment or legal application (the law makes the application) of payment will be now govern.] ***Meaning:*** *If **neither the debtor nor the creditor chooses** how the payment should be applied, then **the law will decide for them**.* [Rules on legal application of payment] --------------------------------------------------- [The payment should be applied to the more onerous debts:] 1. [When a person is bound as principal in one obligation and as surety in another, the former is more onerous.] *If you owe money as a **main borrower** and as a **guarantor (surety)** for someone else, your **own debt** is more important and gets paid first.* 2. [When there are various debts, the oldest ones are more burdensome.] ***Older debts** are given priority because they've been unpaid longer.* 3. [Where one bears interest and the other does not, even if the latter is the older obligation, the former is considered more onerous.] *If one debt **has interest** and the other does not, the one with **interest** is more urgent, even if the other debt is older.* 4. [Where there is an encumbrance, the debt with a guaranty is more onerous than that without security.] *If one debt has **collateral (a guarantee)** and another does not, the secured debt is paid first.* 5. [With respect to indemnity for damages, the debt which is subject to the general rules on damages is less burdensome than that in which there is a penal clause]. *If one debt has **penalties (extra charges for late payment)** and another does not, the one with penalties is more important.* 6. [The liquidated debt is more burdensome than the unliquidated one.] *If one debt already has a **fixed amount** (liquidated) and the other **still needs to be calculated**, the fixed debt is paid first.* 7. [An obligation in which the debtor is in default is more onerous than one in which he is not] (Tolentino, 2002). *If a debt is **already overdue (in default)**, it is more urgent than one that is still within the payment period.* NOTE: [If the debts happen to be of same nature and burden, the payment shall be applied] [proportionately. Effect of creditor's refusal If the debtor makes a proper application of payment, but the creditor refuses to accept it because he wants to apply it to another debt, such creditor will incur in delay (Tolentino, 1991).] ***Meaning:*** ***Special Rule:** If all debts are equal in burden, the payment is **split proportionally** among them.* ***What Happens If the Creditor Refuses Payment?*** - *If the debtor **properly applies** the payment to the correct debt but the creditor **refuses it** because they want it to go to a different debt, the creditor is considered **delayed (in legal default)**.* PAYMENT BY CESSION ================== [Cession The assignment or cession contemplated here is the abandonment of the universality of the property of the debtor for the benefit of his creditors in order that such property may be applied to the payment of the credits.] [The initiative comes from the debtor, but it must be accepted by the creditors in order to become effective. A voluntary assignment cannot be imposed upon a creditor who is not willing to accept it.] [If the offer is not accepted by the creditors, the same end may be attained by a proceeding in insolvency instituted in accordance with Insolvency Law] [Circumstances evidencing payment by cession Debtor abandons all of his property for the benefit of his creditors in order that from the proceeds thereof, the latter may obtain payment of credits.] ***Meaning:*** *It is when a **debtor** (someone who owes money) gives up all their property to their **creditors** (people they owe money to) so that the creditors can sell it and use the money to pay off debts.* ***Key Points:**\ The debtor **voluntarily offers** to give up their property.\ The creditors must **agree** to this arrangement for it to take effect.\ If the creditors **don't accept**, the debtor may have to go through **insolvency proceedings** (a legal process for people who can't pay their debts).* Requisites: ----------- 1. Plurality of debts; (***Multiple Debts** -- The debtor must owe money to **several** creditors.)* 2. Partial or relative insolvency of the debtor; *(**Debtor Cannot Fully Pay Debts** -- The debtor must be **partially insolvent** (not completely bankrupt but unable to pay all debts)* and 3. Acceptance of the cession by the creditors; (***Creditors Accept the Cession** The creditors must agree to take the debtor's property as payment.)* +-----------------------------------+-----------------------------------+ | DATION IN PAYMENT | PAYMENT IN CESSION | +===================================+===================================+ | | | +-----------------------------------+-----------------------------------+ | Maybe one creditor. | Plurality of creditors. | +-----------------------------------+-----------------------------------+ | | | +-----------------------------------+-----------------------------------+ | Not necessarily in state of | Debtor must be partially or | | financial difficulty. | relatively insolvent. | +-----------------------------------+-----------------------------------+ | | | +-----------------------------------+-----------------------------------+ | Thing delivered is considered as | Universality or property of | | equivalent of | debtor is what is | | | | | performance. | ceded. | +-----------------------------------+-----------------------------------+ | | | +-----------------------------------+-----------------------------------+ | Payment extinguishes obligation | Merely releases debtor for net | | to the extent of the value of the | proceeds of things ceded or | | thing delivered as agreed upon, | assigned, unless there is | | proved or implied from the | contrary intention. | | conduct of | | | | | | the creditor. | | +-----------------------------------+-----------------------------------+ | | | +-----------------------------------+-----------------------------------+ | Ownership is transferred to CR | Ownership is not transferred. | | upon delivery. | | +-----------------------------------+-----------------------------------+ | | | +-----------------------------------+-----------------------------------+ | An act of novation | Not an act of novation. | +-----------------------------------+-----------------------------------+ | | | +-----------------------------------+-----------------------------------+ | Does not presuppose insolvency | Presupposes insolvency | +-----------------------------------+-----------------------------------+ Tender of payment ----------------- [The definitive act of offering to the creditor what is due to him together with the demand that the creditor accepts the same] (FEBTC v. Diaz Realty Inc., G.R. No. 138588, August 23, 2001). [Tender of payment is the manifestation by debtors of their desire to comply with or to pay their obligation] (Sps. Benos v. Sps. Lawilao, G.R. No. 172259, December 5, 2006). NOTE: If the creditor refuses the tender of payment without just cause, the debtors are discharged from the obligation by the consignation of the sum due (Sps. Benos v. Sps. Lawilao, G.R. No. 172259, December 5, 2006). Tender of payment is a preparatory act which precedes consignation. The tender of payment by itself does not cause the extinguishment of the obligation unless completed by consignation. (Tolentino, 1991). ***Meaning:*** *Tender of payment is when a **debtor** (someone who owes money) **formally offers** to pay their creditor (the person they owe). The debtor asks the creditor to accept the payment, but if the creditor **refuses without a valid reason**, the debtor is **not automatically free** from their obligation. Instead, they must proceed with **consignation**.* ***Key Points:**\ The debtor shows they are **ready and willing** to pay.\ If the creditor **unjustly refuses**, the debtor **must deposit** the payment with the court (this is called consignation).\ Tender of payment **alone** does not cancel the debt. It must be **followed by consignation**.* Consignation ------------ [Act of depositing the object of the obligation with the court or competent authority after the creditor has unjustifiably refused to accept the same or is not in a position to accept it due to certain reasons or circumstances] (Pineda, 2000). NOTE: Once the consignation has been duly made, the debtor may ask the judge to order the cancellation of the obligation (NCC, Art. 1260). ***Meaning:*** *Consignation is when a debtor **deposits the money or object owed** with the court or another authority because the creditor **refused to accept payment** or is **unable to accept it** (e.g., they are missing or incapacitated).* ***Key Points:**\ The debtor **files a case in court** and deposits the amount owed.\ Once consignation is **approved**, the debtor can ask the court to **cancel the debt**.\ If the creditor **accepts** the deposit, the debt is **settled**.* *If the creditor **refuses**, the court will **decide** if the consignation is valid.* Requisites of consignation -------------------------- 1. There was a debt due; *(There must be a valid debt.)* 2. The consignation of due obligation was made because of some legal cause provided under NCC, Art. 1256; *(There must be a legal reason for consignation (e.g., creditor refuses to accept payment).* 3. The previous notice of the consignation had been given to the person interested in the performance of the obligation; *(Debtor must notify the creditor before making the deposit.)* 4. The amount or thing due was placed at the disposal of the court; *(Debtor must deposit the money/object owed with the court.)* and 5. That after the consignation had been made the persons interested were notified thereof. *(Debtor must notify the creditor again after the deposit.)* NOTE: [Requirement No. 5 may be complied with by the service of summons upon the defendant creditor together with a copy of the complaint.] After this notice, the creditor may: a. [Accept the thing or amount deposited, in which case the matter of the payment is terminated]; b. [Refuse to accept the thing or amount, in which case a trial must be held to determine the validity of consignation. The creditor may neither accept nor refuse in which case the debtor may ask the court to cancel the obligation after showing that the requisites of consignation have been complied with] (NCC, Art. 1260). NOTE[: Tender of payment must be valid and unconditional] *(it cannot have conditions like \"only if you do this first\").* (Sps. Rayos v. Reyes, G.R. No. 150913, February 20, 2003). **Substantial compliance is not enough**. [The giving of notice to the persons interested in the performance of the obligation is mandatory. Failure to notify the persons interested in the performance of the obligation will render the consignation void] (Dalton v. FGR Realty and Development Corp., G.R. No. 172577, January 19, 2011). ***Meaning:** Proper Notice is Required \-- Consignation is only valid if the debtor notifies the creditor (or other people involved) before depositing the money or object with the court.\ If the debtor fails to give notice, the consignation is invalid and does not count as payment.* **Consignation is necessarily judicial.** [Art. 1258 of the CC specifically provides that consignation shall be made by depositing the thing or things due at the disposal of judicial authority. The said provision clearly precludes consignation in venues other than the courts] (Sps. Oscar and Thelma Cacayorin v. Armed Forces and Police Mutual Benefit Association, Inc., G.R. No. 171298, April 15, 2013). ***Meaning:** Consignation Must Be Done in Court \-- Consignation is a legal process and must be done through the courts. Depositing the payment anywhere other than the court (e.g., a bank or third party) is not valid.* Effectivity of consignation as payment -------------------------------------- 1. Creditor is Absent or unknown, or doesn't appear at place of payment; *The debtor doesn't know where or how to pay them.* 2. Creditor Refuses to issue a receipt without just cause; *The debtor wants to pay, but the creditor won't acknowledge it.* 3. Title of the obligation has been lost; *The debtor cannot get proof of the obligation.* 4. Creditor is Incapacitated to receive payment at the time it is due; *The creditor is a minor, mentally incapacitated, or legally restricted;* or 5. Two or more persons claim the right to collect; *If two or more people are fighting over the right to receive payment, the debtor can deposit it in court*. (NCC, Art. 1256). NOTE: [The expenses of consignation, when properly made, shall be charged against the creditor] (NCC, Art. 1259). *If consignation is **properly done**, the **creditor pays for the expenses** of the court deposit.* [Right of the debtor to withdraw the thing deposited] [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 (NCC, Art.1260).] ***Debtor Can Take Back the Payment (Before It's Accepted or Approved)*** - *If the **creditor has not yet accepted** the payment, or* - *If the **court has not yet declared** the consignation valid,* - *The **debtor can still withdraw** the money or item deposited.* - *If the debtor takes it back, the **debt remains unpaid** and stays in force.* NOTE: [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] (NCC, Art. 1261). ***What Happens If the Creditor Allows the Debtor to Take It Back?*** - *The **creditor loses any special rights** (such as priority claims) over the payment.* - ***Co-debtors, guarantors, and sureties are released** from their obligations.* LOSS OF THE THING DUE ===================== [Loss here is not contemplated in its strict and legal meaning and is not limited to obligations to give, but extends to those which are personal, embracing therefore all causes which may render impossible the performance of the prestation. In some Codes, this is designated as impossibility of performance.] NOTE: [The impossibility of performance must be subsequent to the execution of the contract in order to extinguish the obligation; if the impossibility already existed when the contract was made, the result is not extinguishment but inefficacy of the obligation under NCC, Articles 1348 and 1493.] ***Explained Simply:*** ***What Does \"Loss\" Mean in This Context?** It **does not only** mean physical destruction. / It also includes situations where it becomes **impossible** for the debtor to fulfill their obligation for any reason. / In some laws, this is called **\"impossibility of performance.\"*** ***When Does It Apply?** The obligation is **canceled** if the thing becomes impossible to deliver **after** the contract was made. / If it was **already impossible** when the contract was signed, then the contract was **invalid from the start** (not just canceled later).* When a thing is considered lost (DOPE) -------------------------------------- 1. [It Disappears in such a way that its existence is unknown;] ***D**isappears completely (e.g., a painting lost at sea).* 2. [It goes Out of commerce;] ***O**utside of commerce (e.g., a banned item that cannot be legally traded).* 3. It Perishes; or ***P**erishes (e.g., a perishable good like fresh seafood spoiling).* 4. [Its Existence is unknown or if known, it cannot be recovered]. ***E**xists but cannot be recovered (e.g., a stolen car that is never found).* Effect of loss of the thing/object of the obligation If the obligation is a: ---------------------------------------------------------------------------- 1. [Determinate obligation to give:] a. [The thing lost must be determinate;] b. [The thing lost is without fault of the debtor;] and c. [The thing is lost before the debtor has incurred delay] (NCC, Art. 1262) GR: [The obligation is extinguished when the object of the obligation is lost or destroyed] (NCC, Art. 1262). a. [Law provides otherwise] (NCC, Art. 1262); b. [Nature of the obligation requires the Assumption of risk]; c. [Stipulation to the contrary]; d. [Debtor Contributed to the loss]; e. [Loss the of the thing occurs after the debtor incurred in Delay]; f. [When debtor Promised to deliver the same thing to two or more persons who do not have the same interest] (NCC, Art. 1165); g. [When the debt of a certain and determinate thing proceeds from a Criminal offense] (NCC, Art. 1268); and h. [When the obligation is Generic] (NCC, Art. 1263). 2. Generic obligation to give: GR: The obligation is not extinguished because a generic thing never perishes (genus nun guam perit (NCC, Art. 1263). a. In case of generic obligations whose object is a particular class or group with specific or determinate qualities (delimited generic obligation); b. In case the generic thing has already been segregated or set aside, in which case, it has become specific. 3. An obligation to do -- The obligation is extinguished when the prestation becomes legally or physically impossible without the fault of the obligor (NCC, Art. 1266). Types of impossibility to perform an obligation to do ----------------------------------------------------- 1. Legal impossibility -- Act stipulated to be performed is subsequently prohibited by law. 2. Physical impossibility -- Act stipulated could not be physically performed by the obligor due to reasons subsequent to the execution of the contract (Pineda, 2000). NOTE: The impossibility must be after the constitution of the obligation. If it was before, there is nothing to extinguish. Effect of partial loss ---------------------- 1. Due to the fault or negligence of the debtor -- Creditor has the right to demand the rescission of the obligation or to demand specific performance, plus damages, in either case. 2. Due to fortuitous event: a. Substantial loss -- Obligation is extinguished. b. Unsubstantial loss -- The debtor shall deliver the thing promised in its impaired condition (NCC, Art. 1264). Effect when the thing is lost in the possession of the debtor ------------------------------------------------------------- XPN: Presumption shall not apply in case loss is due to earthquake, flood, storm, or other natural calamity (NCC, Art. 1262). 1. Debtor incurred in delay; or 2. Debtor promised to deliver the thing to two or more persons with different interests \[NCC, Art. 1165(3)\]. Effect of unforeseen difficulty of fulfilment --------------------------------------------- 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 (NCC, Art. 1267). The impossibility of performance of an obligation to do shall release the obligor. A principle in international law which means that an agreement is valid only if the same conditions prevailing at the time of contracting continues to exist at the time of performance. It is the basis of the principle of unforeseen difficulty of service (NCC, Art. 1267). Requisites in order to relieve the debtor from his obligation, in whole or in part, based on unforeseen difficulty of fulfilment -------------------------------------------------------------------------------------------------------------------------------- 1. Event or change in circumstance could not have been foreseen at the time of the execution of the contract; 2. Such event makes the performance extremely difficult but not impossible; 3. The event must not be due to the act of any of the parties; and 4. The contract is for a future prestation (Tolentino, 2002). Debt which proceeds from a criminal offense ------------------------------------------- GR: Debtor shall not be exempted from the payment of his obligation regardless of the cause of the loss. XPN: The thing having been offered by debtor to the person who should receive it, the latter refused without justification to accept it (NCC, Art. 1268). NOTE: Offer referred in Art. 1268 is different from consignation; the former refers to extinguishment of obligation through loss while the latter refers to the payment of the obligation. Creditor's right of action -------------------------- 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 (NCC, Art. 1269). This refers not only the rights and actions which the debtor may have against third persons, but also to any indemnity which the debtor may have already received. CONDONATION OR REMISSION OF DEBT ================================ An act of liberality by virtue of which the creditor, 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 condonation or remission refers (Pineda, 2000). 1. Must be Gratuitous; 2. Acceptance by the debtor; 3. Must not be Inofficious; 4. Formalities provided by law on Donations must be complied with if condonation is express; and 5. An Existing demandable debt at the time the remission is made. NOTE: Remission or condonation of a debt is in reality a donation (Jurado, 2010). Form of express remission ------------------------- It must comply with the forms of donation (NCC, Art. 1270). Form of implied remission The Code is silent with respect to the form of implied remission. There must be acceptance by the obligor or debtor (Jurado, 2010). Manner and kinds of remission: ------------------------------ 1. Total -- Refers to the remission of the whole of the obligation; 2. Partial -- Remission of the part of the obligation: to the amount of indebtedness or to an accessory obligation only (such as pledge or interest), or to some other aspect of the obligation (such as solidary); 3. Inter vivos - Effective during the lifetime of the creditor; 4. Mortis causa - Effective upon death of the creditor. In this case, the remission must be contained in a will or testament (Tolentino, 1991); 5. Express -- When it is made formally, it should be in accordance with the forms of ordinary donations with regard to acceptance, amount, and revocation; and 6. Implied -- When it can be inferred from the acts of the parties Effect of delivery of evidence of credit to debtor -------------------------------------------------- If the creditor voluntarily delivers the private document evidencing the credit to the debtor, there is a presumption that he renounces his right of action against the latter for the collection of the said credit (Jurado, 2010). NOTE: The presumption here is only prima facie and may be overcome by contrary evidence (Tolentino, 1991). Requisites ---------- 1. The document evidencing the credit must have been delivered by the creditor to the debtor; 2. The document must be a private document; and 3. The delivery must be voluntary (NCC, Art. 1271). NOTE: If the document is public, the presumption does not arise considering the fact that the public character of the document would always protect the interest of the creditor (Jurado, 2010). Effect of remission in general ------------------------------ It extinguishes the obligation in its entirety or in the part or aspect thereof to which the remission refers (Jurado, 2010). Effect of the remission of the principal debt with respect to the accessory obligation and vice versa The renunciation of the principal debt shall extinguish the accessory but the waiver of the latter shall leave the former in force (NCC, Art. 1273). NOTE: 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 (NCC, Art. 1274). Effect of inofficious condonation --------------------------------- It may be totally revoked or reduced depending on whether or not it is totally or only partly inofficious (Pineda, 2000). The obligation remitted is considered inofficious if it impairs the legitime of the compulsory heirs (NCC, Art. 752). Acceptance by the debtor ------------------------ The acceptance by the debtor is required. There can be no unilateral condonation. This is because condonation or remission is an act of liberality. It is a donation of an existing credit, considered a property right, in favor of the debtor, it is required that the debtor gives his consent thereto by making an acceptance. If there is no acceptance, there is no condonation (Pineda, 2009). CONFUSION OR MERGER OF RIGHTS ============================= There is a confusion when there is a meeting in one person of the qualities of a creditor and debtor of the same obligation (4 Sanchez Roman 421). Requisites of confusion or merger of rights ------------------------------------------- 1. It must take place between the creditor and the principal debtor (NCC, Art. 1276); 2. The very same obligation must be involved (for if the debtor acquires rights from the creditor, but not the particular obligation in question, there will be no merger); 3. The confusion must be total or as regards with the entire obligation. Effect of confusion or merger of rights --------------------------------------- The creditor and debtor become the same person involving the same obligation. Hence, the obligation is extinguished (NCC, Art. 1275). There can be partial confusion ------------------------------ It will be definite and complete up to the extent of the concurrent amount or value, but the remaining obligation subsists (Pineda, 2000). Effect of confusion or merger in relation to the guarantors ----------------------------------------------------------- 1. Merger which takes place in the person of the principal debtor or principal creditor benefits the guarantors. The contract of guaranty is extinguished; 2. Confusion which takes place in the person of any of the guarantors does not extinguish the obligation (NCC, Art. 1276). Effect of confusion or merger in one debtor or creditor in a joint obligation ----------------------------------------------------------------------------- GR: Joint obligation is not extinguished since confusion is not definite and complete with regard to the entire obligation. A part of the obligation still remains outstanding. XPN: Obligation is extinguished with respect only to the share corresponding to the debtor or creditor concerned. In effect, there is only partial extinguishment of the entire obligation (NCC, Art. 1277; Pineda, 2000) Effect of confusion or merger in one debtor or creditor in a solidary obligation -------------------------------------------------------------------------------- If a solidary debtor had paid the entire obligation, the obligation is totally extinguished without prejudice to the rights of the solidary debtor who paid, to proceed against his solidary co-debtors for the latter's individual contribution or liability (NCC, Art. 1215). Revocation of confusion or merger of rights ------------------------------------------- If the act which created the confusion is revoked for some causes such as rescission of contracts or nullity of the will or contract, the confusion or merger is also revoked. The subject obligation is revived in the same condition as it was before the confusion. NOTE: During such interregnum, the running of the period of prescription of the obligation is suspended. (Pineda, 2000) COMPENSATION ============ It is a mode of extinguishing obligations that take place when two persons, in their own right, are creditors and debtors of each other (NCC, Art. 1278). It is the offsetting of the respective obligation of two persons who stand as principal creditors and debtors of each other, with the effect of extinguishing their obligations to their concurrent amount. Requisites of compensation -------------------------- For the compensation to be proper, it is necessary that (NCC, Art. 1279): 1. Each one of the obligors must be bound principally, and that he be at the same time a principal creditor of the other except guarantor who may set up compensation as regards what the creditor may owe the principal (NCC, Articles. 1279-1280); 2. Both debts consist in 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; 3. Both debts are due; 4. Both debts are liquidated and demandable; 5. Neither debt must be retained in a controversy commenced by third person and communicated in due time to the debtor (neither debt is garnished) (NCC, Art. 1279); and 6. Compensation must not be prohibited by law. (NCC, Art. 1290). NOTE: When all the requisites mentioned in Art. 1279 of the CC 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 (NCC, Art. 1290). Effects of compensation: ------------------------ 1. Both debts are extinguished; 2. Interests stop accruing on the extinguished obligation or the part extinguished; 3. The period of prescription stops with respect to the obligation or part extinguished; and 4. All accessory obligations of the principal obligation which has been extinguished are also extinguished Compensation v. Payment ----------------------- -- -- -- -- -- -- -- -- -- -- -- -- -- -- Debts or obligations not subject to compensation ------------------------------------------------ 1. Debts or obligations arising from contracts of depositum (NCC, Art. 1287); 2. Debts arising from obligations of a depositary; 3. Debts arising from obligations of a bailee in commodatum; 4. Claims for support due by gratuitous title; 5. Obligations arising from criminal offenses (NCC, Art. 1288); and 6. Certain obligations in favor of government. e.g. Taxes, fees, duties, and others of a similar nature. KINDS OF COMPENSATION ===================== 1. Legal compensation -- by operation of law; 2. Conventional -- by agreement of the parties; 3. Judicial (set-off) -- by judgment of the court when there is a counterclaim duly pleaded, and the compensation decreed; and 4. Facultative -- may be claimed or opposed by one of the parties. Conventional compensation ------------------------- It is one that takes place by agreement of the parties. Effectivity of conventional compensation ---------------------------------------- XPN: The parties may agree that their mutual debts be compensated even if the same are not yet due. (NCC, Art. 1282). Judicial compensation --------------------- 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 (NCC, Art. 1283). All the requisites mentioned in Art. 1279 must be present, except that at the time of filing the pleading, the claim need not be liquidated. The liquidation must be made in the proceedings. Facultative compensation ------------------------ One of the parties has a choice of claiming or opposing the compensation but waives his objection thereto such as an obligation of such party is with a period for his benefit alone and he renounces the period to make the obligation become due. Facultative compensation is unilateral and does not require mutual agreement; voluntary or conventional compensation requires mutual consent. e.g. X owes Y P100,000 demandable and due on April 1, 2012. Y owes X P100, 000 demandable and due on or before April 15, 2012. Y, who was given the benefit of the term, may claim compensation on April 1, 2012. On the other hand, X, who demands compensation, can be properly opposed by Y because Y could not be made to pay until April 15, 2012. NOTE: Compensation can be renounced either at the time an obligation is contracted or afterwards (Tolentino, 1991). It can be renounced expressly or impliedly. Examples of implied renunciation: --------------------------------- 1. By not setting it up in the litigation; 2. By consenting to the assignment of credit under NCC, Art. 1285; or 3. By paying debt voluntarily, with knowledge that it has been extinguished by compensation (Tolentino, 1991). Obligations subject to facultative compensation When one of the debts arises from: ---------------------------------------------------------------------------------- 1. Depositum; 2. Obligations of a depositary; 3. Obligations in commodatum; 4. Support; and 5. Civil liability from a crime. NOTE: NCC, Art. 1288 prohibits compensation if one of the debts consists in civil liability arising from a penal offense. However, the victim is allowed to claim compensation. If one or both debts are rescissible or voidable ------------------------------------------------ When one or both debts are rescissible or voidable, they may be compensated against each other before they are judicially rescinded or avoided (NCC, Art. 1284). If the prescriptive period had already lapsed, there is automatic compensation and the same will not be disturbed anymore. Whereas, if the debt is rescinded or annulled, compensation shall be restitution of what each party had received before the rescission or annulment. Effects of assignment on compensation of debts ---------------------------------------------- 1. **After the compensation took place** 2. Before compensation took place ------------------------------ a. With the consent of the debtor -- Compensation cannot be set up except when the right to compensation is reserved. b. With the knowledge but without consent of the debtor -- Compensation can be set up regarding debts previous to the cession or assignment but not subsequent ones. c. Without the knowledge of debtor - Can set up compensation as a defense for all debts maturing prior to his knowledge of the assignment. Renunciation of compensation ---------------------------- NOVATION ======== It is the substitution or change of an obligation by another, resulting in its extinguishment or modification, either by changing the object or principal conditions, or by substituting another in the place of the debtor or by subrogating a third person to the rights of the creditor (Pineda, 2000). 1. Valid Old obligation; 2. Intent to extinguish or to modify the old obligation; 3. Capacity and consent of all the parties to the new obligation (except in case of expromission where the old debtor does not participate); 4. Substantial difference of the old and new obligation -- on every point incompatible with each other (implied novation); and 5. Valid New obligation. Presumption of novation ----------------------- Novation is never presumed; it must be proven as a fact either by: 1. Explicit declaration -- If it be so declared in unequivocal terms; or 2. Material incompatibility -- That the old and the new obligations be on every point incompatible with each other (NCC, Art. 1292). Express novation ---------------- Takes place only when the intention to effect a novation clearly results from the terms of the agreement or is shown by a full discharge of the original debt (Jurado, 2010). Implied novation ---------------- It is imperative that the old and new obligations must be incompatible with each other. The test of incompatibility between the old and the new obligations is to determine whether or not both of them can stand together, each having its own independence. If they can stand together, there is no incompatibility; consequently, there is no novation. If they cannot stand together, there is incompatibility; consequently, there is novation (Borja v. Mariano, G.R. No. L-44041, October 28, 1938). NOTE: Novation is never presumed and the animus novandi (intent to make a new obligation) whether totally or partially, must appear by express agreement of the parties or by their acts that are too clear and unequivocal to be mistaken. Two-fold functions of novation ------------------------------ 1. It extinguishes the old obligation; and 2. Creates a new obligation in lieu of the old one. Kinds of novation ----------------- 1. **As to essence** a. Objective or real novation -- Changing the object or principal conditions of the obligation (NCC, Art. 1291). 1. Expressly recognizes the first obligation; 2. Changes only the terms of payment; 3. Adds other obligation not incompatible with the old ones; or 4. Merely supplements the first one. b. Subjective or personal novation -- Change of the parties. i. Substituting the person of the debtor (passive novation) -- may be made without the knowledge of or against the will of the latter, but not without the consent of the creditor. a. Delegacion -- The substitution is initiated by the old debtor himself (delegante) by convincing another person (delegado) to take his place and to pay his obligation to the creditor. b. Expromission -- The substitution of the old debtor by a new debtor is upon the initiative or proposal of a third person. ii. Subrogating a third person to the rights of the creditor (active novation) c. Mixed -- Combination of the objective and subjective novation. 3. As to form of their constitution -------------------------------- a. Express -- The parties declared in unequivocal terms that the obligation is extinguished by the new obligation. b. Implied -- No express declaration that the old obligation is extinguished by the new one. The old and new obligation is incompatible on every material point (NCC, Art. 1292). 4. As to extent of their effects ----------------------------- c. Total or extinctive -- Obligation is originally extinguished. NOTE: Four requisites of extinctive novation: 1. A previous valid obligation; 2. An agreement of all parties concerned to a new contract; 3. The extinguishment of the old obligation; and 4. The birth of a valid new obligation (Iloilo Traders Finance, Inc., v. Heirs of Soriano, G.R. No. 149683, June 16, 2003). 5. As to their origin ------------------ d. Legal novation -- By operation of law (NCC, Art. 1300 & 1302). e. Conventional novation -- By agreement of the parties (NCC, Arts. 1300-1301). 6. As to presence of absence of condition -------------------------------------- f. Pure -- New obligation is not subject to a condition. g. Conditional -- When the creation of the new obligation is subject to a condition. Rights of the new debtor ------------------------ 1. With the debtor's consent -- Right of reimbursement and subrogation. 2. Without the consent of the old debtor or against his will -- Right to beneficial reimbursement. Novation by substitution of debtor ---------------------------------- The consent of the creditor is mandatory both in delegacion and expromission (NCC, Art. 1293). It may be express or implied from his acts but not from his mere acceptance of payment by a third party, for there is no true transfer of debt. NOTE: Creditor's consent or acceptance of the substitution of the old debtor by a new one may be given at anytime and in any form while the agreement of the debtor subsists (Asia Banking Corp. v. Elser, G.R. No. L-30266, March 25, 1929). Requisites of delegacion ------------------------ 1. Substitution is upon the initiative or proposal of the old debtor himself by proposing to the creditor the entry of another (third person) as the new debtor who will replace him in payment of the obligation; 2. The creditor accepts and the new debtor agrees to the proposal of the old debtor; and 3. The old debtor is released from the obligation with the consent of the creditor. Insolvency of the new debtor in delegacion GR: Insolvency of the new debtor (delegado), who has been proposed by the original debtor (delegante) and accepted by the creditor (delegatario), shall not revive the action of the latter against the original obligor (NCC, Art. 1295). 1. Insolvency was already existing and of public knowledge, or known to the debtor; - (NCC, Art. 1295); or 2. Insolvency of the new debtor was already existing and known to the original debtor at the time of the delegation of the debt to the new debtor (NCC, Art. 1295). Requisites of expromission -------------------------- 1. Substitution is upon the initiative or proposal of a third person who will step into the shoes of the debtor; 2. Creditor must give his consent to the proposal of the third person; and 3. Old debtor must be released from the obligation with the consent of the creditor. Insolvency of the new debtor in expromission -------------------------------------------- If substitution is without the knowledge or against the will of the debtor, the new debtor's insolvency or non-fulfillment of the obligation shall not give rise to any liability on the part of the original debtor. (NCC, Art. 1294). NOTE: If the old debtor gave his consent and the new debtor could not fulfill the obligation, the old debtor should be liable for the payment of his original obligation. +-----------------------+-----------------------+-----------------------+ | **Person who** | | | | | | | | **initiated the** | | | | | | | | **substitution** | | | +-----------------------+-----------------------+-----------------------+ | **Consent of the** | | | | | | | | **creditor** | | | +-----------------------+-----------------------+-----------------------+ | **Consent of the old | | | | debtor** | | | +-----------------------+-----------------------+-----------------------+ | **Consent of third** | | | | | | | | **person** | | | +-----------------------+-----------------------+-----------------------+ | **Intention of | | | | substitution** | | | +-----------------------+-----------------------+-----------------------+ | **Rights of the new | | | | debtor** | | | +-----------------------+-----------------------+-----------------------+ | **Insolvency or | | | | nonfulfillment of the | | | | obligation of the new | | | | debtor** | | | +-----------------------+-----------------------+-----------------------+ -- -- -- -- -- -- Effects of novation ------------------- 1. Extinguishment of principal also extinguishes the accessory, except: a. Mortgagor, pledgor, surety or guarantor agrees to be bound by the new obligation (Tolentino, 1999); or b. Stipulation made in favor of a third person such as stipulation pour atrui (NCC, Art. 1311) unless beneficiary consents to the novation (NCC, Art. 1296). 2. If old obligation is: c. Void -- Novation is void (NCC, Art. 1298) d. Voidable -- Novation is valid provided that the annulment may be claimed only by the debtor or when ratification validates acts (NCC, Art. 1298). e. If the old obligation was subject to a suspensive or resolutory condition, the new obligation shall be under the same condition, unless it is otherwise stipulated. (NCC, Art. 1299). 3. If old obligation is conditional and the new obligation is pure: f. If resolutory and it occurred -- Old obligation already extinguished; no new obligation since nothing to novate. g. If suspensive and it did not occur -- It is as if there is no obligation; thus, there is nothing to novate. 4. If the new obligation is: h. Void -- Original one shall subsist, unless the parties intended that the former relation should be extinguished in any event (NCC, Art. 1297). i. Voidable -- Novation can take place, except when such new obligation is annulled. In such case, old obligation shall subsist. j. Pure obligation -- Conditions of old obligation deemed attached to the new, unless otherwise stipulated (Tolentino, 1999). k. Conditional Obligation: i. If resolutory -- Valid until the happening of the condition (NCC, Art. 1181). ii. If suspensive and did not materialize -- No novation, old obligation is enforced. (NCC, Art. 1181). Subrogation ----------- It is the active subjective novation characterized by the transfer to a third person of all rights appertaining to the creditor in the transaction concerned including the right to proceed against the guarantors or possessors of mortgages and similar others subject to any applicable legal provision or any stipulation agreed upon by the parties in conventional subrogation. NOTE: 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 (NCC, Art. 1237). Kinds of subrogation -------------------- 1. **As to their creation** a. Legal subrogation -- Constituted by virtue of a law (NCC, Articles 1300 and 1302); b. Voluntary or conventional subrogation -- Created by the parties by their voluntary agreement (NCC, Art. 1300); NOTE: Conventional subrogation of a third person requires the consent of the original parties and of the third person (NCC, Art. 1301); 2. As to their extent ------------------ c. Total subrogation -- Credits or rights of the creditor in the transaction are totally transferred to the third person. d. Partial subrogation -- Only part of the credit or rights of the creditor in the transaction are transferred to the third person. NOTE: A creditor, to whom partial payment has been made, may exercise his right for the remainder and he shall be preferred to the person who has been subrogated in his place in virtue of the partial payment of the same credit (NCC, Art. 1304). Presumption of legal subrogation XPN: In cases expressly mentioned in the law: --------------------------------------------- 1. When a creditor pays another creditor who is preferred, even without the debtor's knowledge; 2. When a third person, not interested in the obligation, pays with the express or tacit approval of the debtor; 3. When, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation pays, without prejudice to the effects of confusion as to the latter's share. (NCC, Art. 1302).