Payment or Performance
There is no hard
Nov 19, 2016 | Posted by Jake Del Puerto | Best Legal
Practices, Obligations & Contracts Law
Payment refers to either the delivery of money and/or
the performance, in any other manner, of an obligation.
The currency stipulated by the parties is the basis of the
payment for debts in money. If it is not possible to do
so, then the debt is to be paid in the currency which is
legal tender in the Philippines. For obligations to give, a
payment is only valid if the person making payment has
free disposal of the thing due and capacity to alienate it.
As a general rule for obligations to give, a debt is only
considered paid if the thing or service in which the
obligation consists has been completely delivered or
rendered. However, there is no valid payment to the
creditor by the debtor who had been judicially ordered
to retain the debt. By way of exception to the general
rule, the debtor who has substantially performed in
good faith its obligations has the right to recover (or
demand performance against the creditor) as if there
had been a strict and complete fulfillment less damages
that the creditor may have been suffered. This is
the rule on substantial compliance.
Example: A store owner bought and paid for 20 sacks of
rice from a supplier. The supplier only delivered 18
sacks of rice. The supplier is considered to have
substantially performed its obligation. As a result, the
supplier’s obligation has been performed as if it was in
strict and complete fulfillment. However, the supplier is
liable for damages to the store owner arising from the
un-delivered 2 sacks of rice.
The parties may stipulate against the use and
application of the rule on substantial compliance if it is
necessary that the obligation be done strictly and
completely. Once they do so, the obligor cannot invoke
the rule on substantial compliance. In such a case, the
obligor will be liable for full damages as if there was no
performance of its obligations.
Best Legal Practices:
Invoke rule on substantial compliance – If the debtor has
substantially performed his obligations in good faith, he
may invoke the rule on substantial compliance in order
to demand payment from the creditor.
and fast rule on how to determine substantial
compliance as it is adjudged on a case to case basis.
Hence, due care should be observed in exercising this
rule.
Stipulate against rule on substantial compliance if
necessary – For obligations that cannot be fulfilled by
substantial compliance, the parties may stipulate
against such rule and clearly state in the contract that
full and complete delivery or performance is required.
Do not accept delivery if there is stipulation against
substantial compliance – If there is a stipulation against
rule on substantial compliance, the creditor may refuse
to accept delivery of incomplete goods or partial
performance. Depending on the nature of the contract,
acceptance of incomplete goods or partial performance
may result in a waiver (e.g. contract for a piece of work).
Accept with protest if acceptance is necessary – If
acceptance is the only option available as when goods
are absolutely necessary for another transaction and to
avoid a breach of a contract with a third party, the
creditor should accept the goods making sure to
expressly protest or object to the substantial
compliance. The protest should be in writing and
properly sent to the other party.
Stipulate rescission as remedy for violating agreement
against substantial compliance – To stress the
importance of the stipulation against rule on substantial
compliance, the parties may expressly stipulate that the
injured party will be entitled to rescission as an available
remedy.
The debtor’s obligation is deemed fully and completely
complied if the creditor accepts the performance,
knowing its incompleteness or irregularity, and without
expressing any protest or objection.
Generally, the debtor is the only one with an interest in
the payment of the obligation. Unless there is a
contrary stipulation, the creditor cannot be compelled
to accept payment or performance by a third person
who has no interest in the fulfillment of the obligation.
Notwithstanding, if a third person paid, he has the right
to reimbursement against the debtor. However, the
extent of the right to reimbursement depends on
whether the debtor had knowledge or consent. If
payment was made with the knowledge or consent of
the debtor, the third person is entitled to full
reimbursement following the principles of contract
and/or unjust enrichment. If payment was made
without the knowledge or against the will of the debtor,
the third person can only recover insofar as the
payment has been beneficial to the debtor and without
any right of subrogation to the creditor.
Example 1: A subsidiary incurred a P10 million debt
from a bank. With the consent of the subsidiary, the
principal company paid the debt. Thereafter, the
principal company may demand and collect P10 million
against its subsidiary.
Example 2: Using the same example above. Without the
knowledge or consent of the subsidiary, the principal
company paid the debt. Around the same time, the
subsidiary also paid P5 million to the bank. The principal
company will only be able to demand and collect P5
million from its subsidiary. The principal company has to
recover the other half from the bank for overpayment.
However, if the third person made payment without
intending to be reimbursed, a donation has been made
which requires the debtor’s consent. Nonetheless,
payment is valid to the creditor who has accepted it.
A payment is properly made only when it is made to the
person in whose favor the obligation has been
constituted, or his successor in interest, or any person
authorized to receive it.
Payment to a third person is valid insofar as it has
redounded to the benefit of the creditor. The benefit
need not be proved in the following situations:
(1) If after the payment, the third person acquires the
creditor’s rights;
(2) If the creditor ratifies the payment to the third
person; or
(3) If by the creditor’s conduct, the debtor has been led
to believe that the third person had authority to receive
the payment.
The debtor is released from his obligation if he paid in
good faith to any person in possession of the credit. This
is significant if the credit instrument involves a
negotiable instrument payable to bearer or has been
endorsed.
Best Legal Practices:
Obtain and keep proof of payments – When making
payments, official receipts or acknowledgement
documents should always be obtained from the
recipient. These serve as the best evidence of payment.
Payment is limited to what has been agreed upon
subject to novation. Hence, the debtor cannot compel
the creditor to receive a different thing than what was
agreed upon regardless of whether it is of the same
value or even if it is more valuable. Conversely, the
creditor cannot be compelled to accept substitution of
an act or forbearance by another in obligations to do or
not to do. However, the parties may enter into a
novation allowing for the change in the object or
principal conditions, as well as the person of the debtor.
For instance, the debtor may make a dation in
payment, whereby its property is alienated as payment
in favor of the creditor who accepts it.
Example: A trucking company may assign its truck to
the bank as payment of a loan. If accepted by the bank,
the value of the truck when sold will be used to deduct
or extinguish the loan obligation of the trucking
company.
In an obligation to deliver an indeterminate or generic
thing, the creditor cannot demand from the debtor a
thing of superior quality if the quality and circumstances
have not been stated. Conversely, the debtor cannot
deliver a thing of inferior quality. If an issue arises, the
purpose of the obligation and other circumstances will
be taken into consideration in resolving the matter.
The creditor cannot be compelled to receive or accept
partial payment unless otherwise stipulated. Similarly,
the debtor cannot be required to make any partial
payment except if there is an agreement thereto.
The creditor may demand and the debtor may effect
payment when the debt is in part liquidated and in
another part unliquidated. The debtor is not required to payment cannot be applied in accordance with the
wait for the liquidation of the unliquidated part. preceding rules, or (2) if the application cannot be
inferred from other circumstances. However, payment
The debtor is liable for extrajudicial expenses which are is applied to all of the debts if they are of the same
required by the payment unless otherwise stipulated. nature and burden.
The delivery of commercial documents produces Except as otherwise stipulated, the debtor may cede or
payment in these situations: (a) when they have been assign his properties to his creditors in order to pay his
cashed, or (2) when they have been impaired through debts. The debtor is released from his obligation to the
the fault of the creditor. In the meantime (before
extent of the net proceeds of the thing assigned.
payment is completed through a commercial
document), the action derived from the original
obligation is held in abeyance.
In the event of an extraordinary inflation or deflation of
the currency stipulated should supervene, it is the value
of the currency at the time of the establishment of the
obligation is the basis for payment unless otherwise
stipulated.

As a general rule, payment is to be made in the place

designated in the obligation. If there is no express
stipulation on the place of payment and the obligation
is to deliver a determinate thing, payment may be made
wherever the thing might be at the moment the
obligation was constituted. If these rules are not
applicable, the place of payment will be the domicile of
the debtor. The debtor is liable for additional expenses
if he changes his domicile in bad faith or after he has
incurred in delay.

In case of various and similar debts in favor of a

creditor, the debtor may exercise its right to application
of payments declaring which debt will be paid at the
time the payment is tendered. The debtor cannot avail
of the right of application to debts which are not yet
due, except: (a) if so stipulated by the parties; and (2) if
the application of payment is made by the party for
whose benefit the term has been constituted.

Once a receipt evidencing application of the payment

has been received, the debtor cannot complain against
the creditor unless there is a cause for invalidating the
contract. However, if the debt produces interest, the
payment of the principal is not complete until the
interest thereon is likewise paid.

The debt which is most onerous to the debtor among

those due will be considered satisfied: (a) if the