CHAPTER 4

EXTINGUISHMENT OF OBLIGATIONS
GENERAL PROVISIONS

THE LAW ON

OBLIGATIONS
and

CONTRACTS
(Summary)
Fatima Elaine B. Atienza
AC-301

Article 1231.
Obligations are extinguished:
(1) By payment or performance;
(2) By the loss of the thing due;
(3) By the condonation or remission of 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. (1156a)
Causes of extinguishment of obligations:

1. Death of a party in case of an obligation requiring

personal service;
2. Mutual desistance or withdrawal;
(It is a concept that derives from the principle that
since mutual agreement can create a contract, mutual
disagreement by the parties can cause its
extinguishment.)
3. Arrival of resolutory period;
4. Compromise;
5. Impossibility of fulfillment;
6. Happening of a fortuitous event.
SECTION 1.- Payment or Performance
Article 1232.

Payment means not only the delivery of money but also the
performance, in any other manner, of an obligation. (n)
Meaning of payment
In an ordinary parlance, payment refers to the delivery of
money.
Legal mode:
Payment may consist of 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.
When a debtor pays damages or penalty in lieu of the
fulfillment of an obligation, there is also payment in the sense
used in Article 1232.
In law, payment and performance are synonymous.

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.
Whoever pays for another may demand from the debtor
what he has paid, except that if he paid without the
knowledge or against the will of the debtor, he can recover
only insofar as the payment has been beneficial to the
debtor. (1158a)
Persons from whom the creditor must accept payment
1. Debtor;
2. Any person who has an interest on the obligation;

Article 1233.

3. A third person who has no interest in the obligation (stipulated)

A debt shall not be understood to have been paid unless

the thing or service in which the obligation consists has
been completely delivered or rendered, as the case may be.
(1157)

Creditor may refuse payment from a third person.

When debt is considered paid.

1. Integrity of prestation

The creditor should have a right to insist on the liability of the

debtor.
The creditor should not be compelled to accept payment from a
third person whom he may dislike/distrust. He may not be sure
if the thing delivered is in accordance with the contract.

- a debt is not understood to have been paid unless the thing or

service has been completely delivered or rendered, as the case
may be

Effect of payment by a third person

- partial or irregular performance will not produce the

extinguishment of an obligation as a general rule

- recovery is only up to the extent or amount of debt at the time of

the payment or the payment that has been beneficial to the debtor

2. Identity of the Prestation

- the very prestation due must be delivered or performed

When the existence of a debt is admitted by the debtor or

established by the evidence of the creditor, the burden of
proving extinguishment by payment devolves upon the debtor
who claims payment.

Article 1236.

1. If made without the knowledge or against the will of the debtor.

2. If made with the knowledge of the debtor.

- the payer has the right of reimbursement and subrogation (to
recover what he has paid and to acquire all the rights of the
creditor)
Article 1245.

Dation in payment, whereby property is alienated to the

creditor in satisfaction of a debt in money, shall be
governed by the law of sales. (n)
Special forms of payment
1. dation in payment;
2. application of payments (strictly speaking, not a special form of
payment)
3. payment by cession;
4. tender of payment and consignation
Meaning of dation in payment
Dation in payment (adjudication or dacion en pago) is a
conveyance of ownership of a thing as an accepted equivalent of
performance; alienation of property.
Example:
D owes C P30,000. To fulfill the obligation, D with the consent of C,
delivers the piano. If the piano, however, is worth less than
P30,000, the conveyance must be deemed to extinguish the
obligation to the extent only of the value agreed upon unless the
parties by their agreement have considered the piano as full
payment, in which case, the obligation is totally extinguished.
The conveyance is, in effect; a novation of the contract.
Article 1249.
The 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.
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.

In the meantime, the action derived from the original

obligation shall be held in the abeyance. (1170)
Meaning of legal tender
Legal tender is that currency which if offered by the debtor in the
right amount, the creditor must accept in payment of a debt in
money.
Payment by means of instruments of credits
1. Right of creditor to refuse or accept
- promissory notes, checks, bills of exchange and other commercial
documents are not legal tender and, therefore, the creditor cannot
be compelled to accept them.
a. The creditor may accept them, without the acceptance
producing the effect of payment; demandability of the
original obligation is suspended
b. The creditor must cash the instrument; when it is
dishonored he can bring an action for non-payment of the debt.
2. Effect on obligation
- payment by means of mercantile documents does not extinguish
the obligation:
a. until they have been cashed;
b. unless they have been impaired through the fault of the creditor.
SUBSECTION 1. Application of Payments
Article 1252.
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.
Unless the parties so stipulate, or when the application of
payment is made by the party for whose benefit the term
has been constituted, application shall not be made as to
debts which are not yet due.

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. (1172a)
Meaning of application of payments
Application of payments is the designation of the debt to which
should be applied the payment made by a debtor who has various
debts of the same kind in favor of one and the same creditor.
Requisites of application of payments
1. 1 debtor, 1 creditor
2. 2 or more debts
3. debts must be of the same kind
4. debts to which payment made by the debtor has been applied
must be due
5. the payment made must not be sufficient to cover all the debts
Application as to debts not yet due
1. there is a stipulation that the debtor may so apply
2. it is made by the debtor or creditor, as the case may be, for
whose benefit the period has been constituted
Rules on application of payments
1. The debtor has the first choice; he must indicate at the time of
making payment, and not afterwards, which particular debt is being
paid.
2. The right to make the application once exercised is irrevocable
unless the creditor consents to the change.
3. If the debtor does not apply payment, the creditor may make the
designation by specifying in the receipt which debt is being paid.
4. If the creditor has not also made the application, or if the
application I not valid, the debt, which is onerous to the debtor
among those due, shall be deemed to have been satisfied.
5. If the debts due are of the same nature and burden, the payment
shall be applied to all of them proportionately.
Article 1253.
If the debt produces interest, payment of the principal shall
not be deemed to have been made until the interests have
been covered. (1173)
The rule is subject, however, to any agreement between the
parties, or to waiver by the creditor.
Article 1254.

When the payment cannot be applied in accordance with

the preceding rules, or if application cannot be inferred
from other circumstances, the debt which is most onerous
to the debtor, among those due, shall be deemed to have
been satisfied.
If the debts due are of the same nature and burden, the
payment shall be applied to all of them proportionately.
(1174a)
When a debt more onerous than another
A debt is more onerous than another when it is more
burdensome to the debtor; no fixed rule here.
MORE ONEROUS
1. Interest-bearing debt
Non-interest-bearing
debt
2. Debt as a sole debtor
Solidary debtor
3. Debts secured by a
Unsecured debts
mortgage/ pledge
4. IB (higher rate)
IB (lower rate)
5. Obligation w/ penalty clause
w/o penalty clause
When debts subject to different burdens
The payment should be applied to all of them proportionately.
SUBSECTION 2.- Payment by Cession
Article 1255.
The debtor may cede or assign his property to his creditors
in payment of his debts. This cession, unless there is
stipulation to the contrary, shall only release the debtor
from responsibility for the net proceeds of the thing
assigned. The agreements which, on the effect of the
cession, are made between the debtor and his creditors
shall be governed by special laws. (1175a)
Meaning of payment by cession
Payment by cession is another special form of payment.
- assignment/ abandonment of all the properties of the debtor for
the benefit of his creditors in order that the latter may sell the
same and apply the proceeds thereof to the satisfaction of their
credits.

Requisites of payment by cession

1. 2 or more creditors
2. the debtor must be (partially) insolvent
3. the assignment must involve all the properties of the debtor
4. the cession must be accepted by the creditors
Effect of payment by cession
Unless there is a stipulation to the contrary, the assignment
does not make the creditors the owners of the property of the
debtor and the debtor is released from his obligation up to the
net proceeds of the sale of the property assigned; the debtor is
still liable.
Dation in Payment
Cession
1. usually only one creditor
several creditors
2. does not presuppose the
the debtor is insolvent at the
insolvency of the debtor
time of assignment
3. does not involve all the
extends to all the property of
property of the debtor
the debtor
4. creditor becomes the owner
creditors only acquire the right
of the thing given
to sell the thing and apply the
proceeds to their credits
proportionately
5. really an act of novation
not

Both are substitute forms of payment/performance.

SUBSECTION 3
Tender of Payment and Consignation

ARTICLE 1256.
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.
Consignation alone shall produce the same effect in the
following cases:

(1) When the creditor is absent or unknown, or does not

appear at the place of payment;
(2) When he is incapacitated to receive the payment at the
time it is due;
(3) When, without just cause, he refuses to give a receipt;
(4) When two or more persons claim the same right to
collect;
(5) When the title of the obligation has been lost. (1176a)
Meaning of tender of payment and consignation
1. Tender of payment
- act, on the part of the debtor, of offering to the creditor the thing
or amount due. The debtor must show that he has in his possession
the thing or money to be delivered at the time of the offer.
2. Consignation
- act of depositing the thing/ amount due w/ the proper court when
the creditor does not desire or cannot receive it, after complying w/
the formalities required by law.
-applicable to obligation to pay
- always judicial
Requisites of valid consignation
1. existence of valid debt w/c is due
2. tender payment by the debtor and refusal w/o justifiable reason
by the creditor to accept it
3. previous notice of consignation to persons interested in
fulfillment of the obligation
4. consignation of the thing/ sum due
5. subsequent notice of consignation made to the interested parties
When tender of payment not required
It has been held that a creditor who, w/o legal justification,
informs his debtor that payment of a debt will not be accepted
thereby waives payment on the date when the payment will be
due; and as a consequence the debtor is, in such case, excused
from making a formal tender of the money on such date.
Requirements for valid tender of payment
1. Tender of payment must comply with the rules on payment/with
the terms required by the contract in making such tender. The
tender, even if valid, does not by itself produce legal payment,
unless it is completed by consignation.

2. It must be unconditional and for the whole amount due and in

legal tender
3. It must be actually made; the debtor must show present ability
to perform by an actual offer of the thing/money due.
Article 1257.
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.
The consignation shall be ineffectual if it is not made
strictly in consonance with the provisions which regulate
payment. (1177)
Prior notice to persons interested required
In the absence of prior notice to the persons interested in the
fulfillment of the obligation, the consignation, as payment, shall
be void.
The purpose of the notice is to give the creditor the chance to
reflect on his previous refusal to accept payment considering
that the expenses of consignation shall be charged against him

and that in case of loss of the thing consigned, he shall bear he

risk thereof.
Article 1258.
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.
The consignation having been made, the interested parties
shall also be notified thereof. (1178)
Consignation must be w/ proper judicial authority
Consignation, by depositing the thing or sum due w/ proper
judicial authority, is necessary to effect payment.
Notice to be given to interested parties of the consignation
made
After the consignation has been made, the interested parties
must also be notified thereof.
The purpose of 2nd notice is to enable the creditor to withdraw
the thing/sum deposited in case he accepts the consignation.