Extinguishment of Obligations

(Summary)

Introduction
Article 1231 enumerates the ways by which obligations are extinguished : by novation,
compensation, merger, remission, payment, or loss. But this list is not exclusive, as there are other ways
by which an obligation may also terminate. Among these are by annulment, rescission the fulfilment of a
resolutory condition or lapse of a resolutory period, and prescription. Death, fortuitous event, discharge
in insolvency (judicial), discharge of a negotiable instrument, and mutual desistance may likewise all be
cited as causes for extinguishment.

What does payment mean?

Payment means not only the delivery of money but also the performance, in any other manner,
of an obligation (1232, CC). It is governed by the principles of integrity and identity.

Integrity. Integrity of payment means that 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
(1233, CC). In this regard, the obligation cannot be rendered in parts in accordance with the integrity
principle. As a matter of fact, the creditor cannot be compelled to receive partial payments; neither may
the debtor be required to make partial payments (1248, CC)

But an obligation may not always be performed immediately in its entirety. There are exceptions:
1. If the obligation has been substantially performed (1234), as when the remaining
unperformed portion is negligible and can no longer be completed without the fault of the
debtor, or when he has performed in good faith;
2. If the creditor knowingly accepts the performance, knowing it to be incomplete, and does
not offer any objection or complaint (1235);
3. If the parties expressly stipulate that delivery or performance can be in parts or instalments;
4. If the debt is partly liquidated (1248), in which case, the creditor can make the debtor
advance the liquidated portion.

Complete or incomplete (in accordance with the foregoing), normally, payment is made by the
debtor to the creditor, or in their stead, their respective agents. However, it may happen that payment
is made not by the original debtor or to the original creditor.

In obligations to give, payment must be made by one who has the free disposal of the thing due
and the capacity to alienate; otherwise, it shall not be valid (1239). If the debtor himself, his agent, or
successor-in-interest, is the one that pays, the obligation is extinguished (1245). The same effect is
achieved by a third person with interest in the obligation, such as a guarantor. However, the guarantor
is given the right to subrogate himself in the place of the creditor in order to get reimbursement from
the debtor (1237).
 If such third person has no interest in or connection to the debt, and attempts to pay in favour
of the debtor, the creditor may not be forced to accept this payment from someone who is considered a
stranger to the contract (1236), and as far as the debtor is concerned, he is not bound to reimburse the
payment made unless he was informed of the act beforehand by the third person without interest and
the debtor did not object to the payment (1237, 1302). In any case, the third party without interest may
recover the payment instead (1236), but if he does not wish to get it back and instead intends the
payment to be a donation to the debtor, the latter should agree to the donation, being a contract in
itself, before the payment can be considered valid and deemed to extinguish the debtor’s obligation to
the creditor (1238).

In the case of payees, the creditor himself, his successor-in-interest, or an authorized agent may
cause the extinguishment (1240), unless he is incapacitated to receive. But his incapacity may not cause
the non-extinguishment of the obligation as long as he keeps the thing delivered, or insofar as the
payment is beneficial to him (1241). Payment to a third party is also okay, as long as the payment
ultimately benefits the creditor, but the problem with this is that the debtor or whoever pays must
prove that this benefit did reach the creditor, in order to consider the obligation extinguished.

Proof of the foregoing benefit is not necessary when:

1. There is subrogation;
2. The creditor ratifies the payment to the third person; and
3. The creditor makes the debtor believe that the third person should and can accept
payment (1241)

In any case, payment in good faith to any person in possession of the credit, whether naturally
connected to the creditor or a third party, releases the debtor from the obligation.

Identity. The identity of payment requires that the very thing, service, or forbearance, as the
object of the prestation, must be performed or observed. The debtor of a thing cannot force the creditor
to accept a different one, although this may be of the same value as, or even more valuable than, that
which is due. But like the principle of integrity, this has exceptions.

The parties may agree that property be alienated to the creditor in satisfaction of a debt in
money (1245). If the thing to be delivered is generic, the debtor must deliver one of average quality, and
the creditor cannot demand something of superior quality (1246, CC).

The parties can also disregard the change in value of the payment in cases of extraordinary
inflation pending the delivery of such payment. The value of the currency at the time of the
establishment of the obligation shall be followed (1250).

Special forms of payment: Application of Payments (1252-1253). If there are several debts
between one debtor and one creditor, and the payment is not enough to cover all debts, whatever
funds are available may be made to apply to any of the debts for the time being. The debtor must
declare, when paying, to which of the debts the payment applies. He cannot however apply payment to
a debt that is not yet due. If there is interest, interest shall be paid first. If the debtor does not make a
declaration and instead accepts from the creditor a receipt in which an application of payment is made,
the debtor cannot complain because he is considered to have waived his right to apply payment to a
certain debt, unless for good reason. If payment cannot be applied in accordance with the foregoing, or
application cannot be inferred, the payment will apply to the most burdensome debt first. If all the
debts are equal in burden, divide the payment to apply to all of them proportionately.

Special forms of payment: Payment by Cession. The debtor may cede or assign his property to
his creditors in payment of his debts. Like Dacion, this is a transfer of property to the creditor, but unlike
Dacion, it is not a transfer of ownership. It merely gives the creditor the right to dispose or liquidate the
property, and apply the proceeds to the obligation. If the proceeds are not enough to cover the debt,

Special forms of payment: Tender of Payment and Consignation.- Here, payment is deposited
with the court (judicial consignation) if the creditor refuses without just cause to accept payment. The
debt must be due and demandable and there must be a valid and unconditional tender of payment
before the consignation process can even begin.

But there are cases where tender is excused. Tender may be excused when the creditor is
absent or unknown or does not appear, because then there is no one to receive payment. Thus it is safer
to go to court and consign. When the creditor is incapacitated, tender is excused as well because of the
risk that he might not keep the payment or use it to his benefit. When without just cause, the creditor
refuses to give a receipt, a debtor may likewise choose to consign for not receiving proof that his
obligation has been fulfilled. The same is true when two or more persons claim the payment; it is safer
for the debtor to deposit the payment in court so as not to make any mistakes as to the person he really
has to pay.

After tender, or in case the tender is excused, the consignation of the thing due must first be
announced to the persons interested in the fulfilment of the obligation. This is a requirement of due
process. And after depositing the things due at the disposal of the judicial authorities, the interested
parties shall also be notified when consignation has been made.

The debtor can withdraw his offer to consign, but it will be better for him to do that before the
creditor accepts the consignation, or before a judicial declaration that consignation has been properly
made. Once it is consigned, only the creditor can withdraw the amount, as the debtor is already out of
the picture (his obligation has been extinguished), unless he is authorized by the creditor to withdraw on
the latter’s behalf. In this second case, the creditor loses all preference over the thing, and even the
guarantors and sureties will be released.
Loss
When is a thing lost? A thing is said to have been lost when it perishes, goes out of commerce,
or disappears in such a way that its existence is unknown, or if known, the thing cannot be recovered.
(1189, CC) And in obligations, the creditor is at risk because if the thing to be delivered is lost without
the fault of the debtor, the creditor gets nothing as the debtor is freed from liability and cannot be
forced to give anything. (1262, CC)

But in review, the debtor may still be liable when the thing is lost, such as in the following cases,
discussed prior:
1. When it is agreed by stipulation or imposed by law
2. The obligation requires assumption of risk
3. Participatory negligence in fortuitous events
4. Loss after delay
5. Loss after promise to two persons with different interests
6. Civil liability in a crime
7. Generic obligations

Note that if the thing is lost while in the possession of the debtor, he has the burden to prove it was
not his fault. But he is freed from this burden if the loss occurs during an earthquake, flood, storm, or
other calamity. (1265, CC)

Meanwhile, in obligations to do, the supervening impossibility of the task, legally or physically, and
without the fault of the debtor, likewise extinguishes the obligation. (1255, CC).

If the loss is only partial, for such partial loss to extinguish the entire obligation, it must be of a
nature that would render the obligation impossible to comply with in a normal manner. So if the loss is
only partial, the courts can determine whether such loss is enough to extinguish the obligation. (1264,
CC) This is more difficult to determine in obligations to do, in which a “partial” loss may be a situation
where the service, though not impossible, becomes of a nature clearly not intended by the parties.
(1267, CC)

Condonation
Simply put, condonation or remission is forgiveness of the debt or the waiver of its
enforcement. This is essentially an act of gratuity, which is a proper consideration for a contract, and
being such, requires acceptance by the debtor. It can be expressly done through some manifestation
such as printed letters, instructions, or as provisions in the contract, or impliedly, through the acts of the
parties.

As an act of gratuity, condonation follows the laws on donations. So aside from acceptance
being necessary, the formalities may be required if you are condoning a debt worth more than
P5,000.00 (the condonation and acceptance must be written), or when you are renouncing the delivery
of real property (the condonation and acceptance must be written and notarized).

Condonations need not necessarily write finis to the story of an obligation. Even after the
creditor passes away, the obligations he condoned may still be taken back if they are found to be
inofficious, that is, in excess of what he would have been allowed to dispose after reserving a certain
portion of his property for his heirs. In this case, the excess over such allowable disposition, or the free
portion of his property, is inofficious and should be returned to the estate of the deceased in order to
satisfy the legitimes of his heirs.

As stated above, in certain cases, writing is required for the condonation to be effective. That
will also serve as proof of the extinguishment of the debtor’s obligation. But suppose there is no written
condonation, and a person issues a promissory note to another, and thereby becomes the latter’s
debtor. If the latter later voluntarily returns that note to the debtor, this may imply a renunciation of the
credit. (1271, CC) When a private document evidencing credit is found in the possession of the debtor,
it presumed that the creditor voluntarily gave it back. (1272, CC) If the condonation by the return of the
document is inofficious, the debtor can uphold it by proving it was actually by reason of the payment of
the debt. (1271, CC)

Accessory obligations will also be extinguished along with the forgiven debt. The accessory
follows the principal. Thus the accessory obligation is also condoned. The opposite, however, may not
be necessarily true. (1273, CC)

Confusion
In confusion or merger of rights, the characters of debtor and creditor are merged in the same
person. (1275, CC) Such a confusion must take place in the person of either the debtor or the creditor.
Thus, if it takes place between a guarantor and a creditor, the obligation of the debtor is not
extinguished. But if it takes place in the character of the debtor, the guarantors are likewise freed.
(1276, CC)

In case of multiple joint subjects, confusion does not extinguish a joint obligation except as
regards the share corresponding to the creditor or debtor in whom the two characters concur. (1277,
CC)

Compensation
This is a situation where two persons, in their own right, are creditors and debtors of each other.
Thus, instead of collecting upon each other, the two parties may decide to just set off and cancel the
debts against each other. It is possible to set off unequal amounts, up to the equal amount, and this may
leave an excess or remainder on one side. It may also be possible to set off just a part of some
obligations. Thus, compensation may be partial or total. In terms of cause, it may be legal, conventional,
or judicial.

For legal compensation, each of the parties must be bound principally as creditors and debtors
of each other. Both their debts must consist of a sum of money or the same kind of consumable, and
both debts must be due, liquidated, and demandable. It must also be stressed that the debts must not
have claims from third persons. When all requisites are present, compensation happens by operation of
law. The debts are extinguished despite the non-awareness of the parties.

This is true for any kind of contract as long as it is not void. For rescissible and voidable
contracts, compensation can still take place before the decree of rescission or avoidance. However,
deposits, criminal penalties, and taxes are not allowed to be set off.

Should there be expenses for exchange or transportation incurred by one party, it is only fair
that an indemnity may be paid. (1286, CC)

If the creditor assigns his credit to a third person, the debtor may or may not consent. Note that the
assignee is a third party and so there may be no compensation even if the debtor consents, unless the
creditor gives notice to both the debtor and the assignee of the presence of compensable credits. With
more reason that there can be no compensation with the assignee if the debtor does not consent, but
the creditor may still compensate debts other than that which was assigned. (1285, CC)

Novation
Art. 1291 states that obligations may be modified by: a) changing their object or principal conditions; b)
substituting the person of the debtor; or c) substituting the person of the creditor. This kind of
modification is called novation, and one that is extinctive, meaning, the old obligation is extinguished
and replaced by a new obligation involving the new object, subject, or circumstance. Otherwise, the
change is merely modificatory.

It is necessary that both the old obligation and the new one be valid. A void obligation does not legally
exist and cannot be novated, even with the intention of curing its invalidity. Technically, in that case,
what exists is only the valid obligation. On the other hand, a valid obligation cannot be novated by a void
one. But if both are valid, the old obligation is extinguished and the new one will subsist.

Novation is never presumed but it can take place without express provision on ground of strict
incompatibility on the contract’s essential elements.

If it is the subjects that are changed, the rules on payment should not be overlooked. The creditor’s
heirs or assigns, agents or representatives, or successors in interest, may all validly accept payment to
effect the extinguishment of an obligation. In the case of debtors, substitution may take place without
the knowledge of the original debtor (expromision) or as proposed by him (delegacion). The substitution
of the debtor must always be with consent of the creditor. Likewise, and recalling the rules on payment,
subrogation may take place, such as when a creditor pays another creditor who is preferred, a third
person w/out interest pays with debtor’s consent, and/or a third person with interest pays even without
debtor’s knowledge. (1302, CC)

If novation properly takes place, however, the old obligation is extinguished, without prejudice to the
taking effect of the new one. Accessory obligations may still subsist in favor of third persons who did not
consent. Conditions also still apply unless otherwise stipulated.