EXTINGUISHMENT OF OBLIGATIONS

A.REGADO

CHAPTER 4 2.) Agreement Simultaneois to

EXTINGUISHMENT OF OBLIGATIONS constitution of Obligation
a) Resolutory Condition
GENERAL PROVISIONS
b)Extinctive period
SECTION 1. – Payment or Performance
Art. 1231. Obligations are extinguished:
(1) By payment or performance:
Art. 1232. Payment means not only the delivery of money but also the
(2) By the loss of the thing due:
performance, in any other manner, of an obligation. (n)
(3) By the condonation or remission of the debt;
MEANING OF PAYMENT
(4) By the confusion or merger of the rights of creditor and debtor;
 Delivery of money
(5) By compensation;
 (1) Delivery of money or (2) Giving of thing other than money
(6) By novation.
 In law, payment and performance are synonymous
ELEMENTS OF PAYMENT (COMMON LAW DOCTRINES)
Other causes of extinguishment of obligations, such as annulment, rescission, 1) Persons (whom to pay and whom payment may be made)
fulfillment of a resolutory condition, and prescription, are governed elsewhere 2) Thing or object in which payment must consist
in this Code. (1156a) 3) Cause
CAUSES OF EXTINGUISHMENT OF OBLIGATIONS IN ADDITION TO ART 1231 4) Mode and form
(1) Death of party (personal obligations) 5) Place and time payment must be made
(2) Mutual Desistance or withdrawal 6) Imputation of expenses occasioned by it
(3) Arrival of a resolutory period 7) Special parts which may modify the same and the effects they generally
(4) Compromise produce
(5) Impossibility of fulfillment BURDEN OF PROVING PAYMENT
(6) Happening of a fortuitous event  When existence of debt is fully established by evidence, the settled rule is that
MODES OF EXTINGUISHMENT OF OBLIGATION the burden of proving extinguishes by payment devolves upon the debtor who
(1) VOLUNTARY (2) INVOLUNTARY pleads payment or offers defense
A. PERFORMANCE A. BY REASON OF SUBJECT  Only when the debtor introduces evidence that the obligation has been
1. Payment 1) Confusion extinguished does the burden shift to the creditor
2. Consignation 2) Death of contracting parties in BEST EVIDENCE OF PAYMENT
B. SUBSTITUTION personal obligations  Receipt
1. Dacion en pago (conveyance of B. BY REASON OF OBJECT
payment) 1.) Lost of thing due/impossibility of Art. 1233. A debt shall not be understood to have been paid unless the thing or
2. Novation performance service in which the obligation consists has been completely delivered or
C.BY RELEASE AGREEMENT C. BY FAILURE TO EXERCISE (RIGHT rendered, as the case may be. (1157)
1.) Agreement subsequent to OF ACTION) DEBT
constitution of obligation 1. Extinctive prescription  May refer to obligation to deliver money or thing other than money, to do or not
a) Mutual waiver to do an act
b) Unilateral waiver REQUISITES TO CONSIDER DEBT PAID
c) Remission
 EXTINGUISHMENT OF OBLIGATIONS
A.REGADO

1) Integrity of Presentation REQUISITES OF ART 1235

- Presentation fulfilled completely 1) Knowledge: Incomplete/Irregular performance
- Partial or Irregular performance does not extinguish obligation
2) Accepts performance without protest or objection
- EXCEPTIONS : ART 1234 & 1235
MEANING OF ACCEPT
2) Identity of Prestations
 Satisfactory/Sufficient/Give Assent or Agree to an incomplete or
- Very prestation due must be delivered or performed
irregular performance
Art. 1234. If the obligation has been substantially performed in good faith, the  Mere receipt of partial payment (x) ; to imply creditor accepts partial
obligor may recover as though there had been a strict and complete payment, his acceptance must be made under circumstances that
fulfillment, less damages suffered by the obligee. (n) indicate his intention to consider the performance complete and to
RECOVERY ALLOWED IN CASE OF SUBSTANTIAL PERFORMANCE IN renounce his claim from defect
GOOD FAITH DEBTOR WHO ALLEGES BAD FAITH :: PROVE IT ; GOOD FAITH IS
 Obligee is benefited PRESUMED
 Obligor should be allowed to recover as if there had been a strict and FORM OF PROTEST OF CREDITOR
complete fulfillment less damages suffered by the oblige.  No specific form required
 Last condition affords a just compensation for the relative breach 1) Reasonable time
committed by obligor 2) Evince that he is not satisfied
 Recognition that there has been a strict & complete fulfillment (subject
to damages) Art. 1236. The creditor is not bound to accept payment or performance by a
REQUSITES FOR APPLICATION OF 1224 third person who has no interest in the fulfillment of the obligation, unless
1) Substantial performance there is a stipulation to the contrary.
- Substantial compliance: Essential requirements 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,
- Breach is only of inconsequential nature and causes no serious
he can recover only insofar as the payment has been beneficial to the debtor.
harm to obligee; slight or technical and unimportant
(1158a)
- (x) material breach of the contract
2) Obligor : In Good faith
PERSONS FROM WHOM CREDITOR MUST ACCEPT PAYMENT
- Good faith is presumed in absence of proof to the contrary
1) Debtor
2) Any person: Interest in Obligation
Art. 1235. When the obligee accepts the performance, knowing its
3) Stipulation : 3P no interest when there is stipulation that he can
incompleteness or irregularity, and without expressing any protest or
make payment
objection, the obligation is deemed fully complied with. (n)
CREDITOR MAY REFUSE PAYMENT BY THIRD PERSON
RECOVERY ALLOWED WHEN INCOMPLETE OR IRREGULAR
 Personal reasons (trust, confidence, preference of dealing) must be
PERFORMANCE WAIVED
considered
 Founded on the principle of estoppel /Waiver of right
EFFECT OF PAYMENT BY THIRD PERSON
 If payment is incomplete or irregular, creditor may properly reject it
 EXTINGUISHMENT OF OBLIGATIONS
A.REGADO

W/O knowledge or against the will W/ Knowledge of debtor the debtor, he can recover only insofar
of debtor as the payment has been beneficial to
Recovery only up to the extent or Payer shall have all the rights of the debtor.
amount of debt at time of payment reimbursement and subrogation. No real extinction of obligation
No subrogation to the rights of but only a change in creditor
creditor such as those arising in
mortgage, guarantee or penal Art. 1238. 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. (n)
Art. 1237. Whoever pays on behalf of the debtor without the knowledge or PAYMENT BY THIRD PERSON WHO DOES NOT INTENT TO BE
against the will of the latter, cannot compel the creditor to subrogate him in REIMBURSED
his rights, such as those arising from a mortgage, guaranty, or penalty. (1159a)  Embodies the idea that no one should be compelled to accept the
RIGHT OF THIRD PERSON TTO SUBROGATION generosity of another
 If without knowledge or against the will of the debtor, third person  Donation, to be valid requires the debtors consent
cannot compel creditor to subrogate him in the latter’s accessory rights  However if the creditor accepts payment, it is valid as to him and the
of mortgage, guaranty or penalty payor although the debtor did not give consent to the donation
 Art 1237 is for the benefit of the debtor, subrogation can only take
place with his consent Art. 1239. In obligations to give, payment made by one who does not have the
 Third persons who wout necessity paid under such conditions is amply free disposal of the thing due and capacity to alienate it shall not be valid,
protected by his right to reimbursement without prejudice to the provisions of Article 1427 under the Title on “Natural
 **Art 1236 & 1237 does not apply where no debtor-creditor Obligations.” (1160a)
relationship exist between persons or whose behalf the payment was MEANING OF FREE DISPOSAL OR CAPACITY TO ALIENATE
made 1. Free disposal of the thing due
 Legal subrogation or subrogation by operation of law is presumed  Thing to be delivered must not be subject to any clam or lien or
SUBROGATION REIMBURSEMENT encumbrance of a third person
2.Capacity to Alienate
Person who pays for the debtor is Third person is entitled merely to the
 Capacity to enter into contract
put in the shoes of the creditor bare right to be refunded to the extent
of Art 1236 (2) without right to FREE DISPOSAL OF THING DUE AND CAPACITY TO ALIENATE REQUIRED
 As a general rule, in obligations to give, payment by one who does not
guarantees and securities of obligation
have the free disposition of thing due or capacity to alienate it is not
Right of reimbursement + other 1236 (2) Whoever pays for another
valid
rights of a creditor pertaining to may demand from the debtor what he
 Thing paid could be recovered
credit against he debtor or third has paid, except that if he paid without
persons the knowledge or against the will of
 EXTINGUISHMENT OF OBLIGATIONS
 Exception : Art 1427 : Minor between 18-21 who has entered into a
contract without consent of parent/guardian, voluntarily pays sum of
money or delivers fungible thing in fulfillment of obligation, there shall
be no right to recover the same from the oblige who has spent or
consumed it in good faith
 Creditor cannot be compelled to accept payment where person paying
has no capacity to make it
Art. 1240. Payment shall be made to the person in whose favor the obligation
has been constituted, or his successor in interest, or any person authorized to
receive it. (1162a)
PERSON TO WHOM PAYMENTS SHALL BE MADE
a) Creditor or Obligee (in whose favor the obligation has been
constituted)
b) His successor in interest
c) Any person authorized to receive it
 Creditor time of payment ; (x) Time of constitution of obligation
 Generally, to discharge an obligation, payment should be made to the
proper person set forth in Art 1240
 When payment is made to a wrong party: Obligation is not extinguished
as to the creditor who is without fault or negligence even if debtor acted
in utmost goof faith and by mistake as to the person of the creditor or
through fraud induced by a third person ----as long as there is no bad
faith on the part of the creditor
MEANING OF ANY PERSON AUTHORIZED TO RECEIVE IT
 Not only person authorized by creditor but also a person authorized by
law to receive payment (Guardian, executor, administrator, liquidator)
 Payment made to agent
- Special Power of Attorney + Nature and extent of alleged
powers
 There must be diligence on the part of the payor to atleast ascertain the
authority of the person authorized to receive
A.REGADO
 Under Art 1242: Payment in good faith to any person in possession of
credit is valid although such person may not be authorized to receive
payment
Art. 1241. Payment to a person who is incapacitated to administer his property
shall be valid if he has kept the thing delivered, or insofar as the payment has
been beneficial to him.
Payment made to a third person shall also be valid insofar as it has redounded
to the benefit of the creditor. Such benefit to the creditor need not be proved in
the following cases:
(1) If after the payment, the third person acquires the creditor’s rights;
(2) If the creditor ratifies the payment to the third person;
(3) If by the creditor’s conduct, the debtor has been led to believe that the third
person had authority to receive the payment. (1163a)
EFFECT OF PAYMENT TO AN INCAPACITATED PERSON
 Not valid
 Unless (1) Kept thing delivered (2) Beneficial to him
 In absence of benefit; it need not to be proved in the 3 cases metioned
above
 Proof of benefit : incumbent upon debtor
 In Art 1240,payment should be made to his legal representative or
through consignation in proper court
EFFECT OF PAYMENT TO THRID PERSON
 GF: Debtor :immaterial
 The creditor was benefited by the payment made by the debtor to the
3P is not presumed and must therefore be satisfactorily established by
the person in interest in proving the fact
 Absence of such proof, payment : error of law and in good faith
 Absence of such proof, payment thereof in error and in law
WHEN BENEFIT TO CREDITOR NEED NOT BE PROVED BY DEBTOR
1) Subrogation of payer in credtor’s rights
2) Ratification by creditor
3) Estoppel on part of the creditor
 EXTINGUISHMENT OF OBLIGATIONS
A.REGADO

 Through estoppel, an admission or representation is rendered Art. 1244. The debtor of a thing cannot compel the creditor to receive a
conclusive upon the person making it and cannot be denied or different one, although the latter may be of the same value as, or more
disproved as against person relying thereon valuable than that which is due.
In obligations to do or not to do, an act or forbearance cannot be substituted
Art. 1242. Payment made in good faith to any person in possession of the credit by another act or forbearance against the obligee’s will. (1166a)
shall release the debtor. (1164) VERY PRESTATION DUE MUST BE COMPLIED WITH (IDENTITY OF
PAYMENT TO THIRD PERSON IN POSSESSION OF CREDIT PRESTATION)
 Possession = possession of credit itself and not merely he documents or (par 1) Real obligation to deliver a specific thing
instruments evidencing the credit - thing different from that due cannot be offered or demanded
 Mere possession of instrument does not entitle holder to payment nor against will of the debtor or as the case may be
does payment release debtor (par 2) Personal obligation (to do or not to do)
 Payer must act in good faith; honest belief : Valid payment - Act to be performed or an prohibited cannot be substituted
 Goof faith presumed against obligor’s will
WHEN PRESTATION MAY BE SUBSTITUTED
Art. 1243. Payment made to the creditor by the debtor after the latter has been 1. When oblige consents
judicially ordered to retain the debt shall not be valid. (1165) 2. Facultative obligations
WHEN PAYMENT TO CREDITOR IS NOT VALID Exception to the exception
 This provision can only be invoked by creditor - Facultative obligations ; debtor is given the right to render
 Payment made subsequently by debtor-stranger shall not be valid if another prestatio in substitution
plaintiff wins the case and cannot collect from debtor to whom - Waiver of such : In a stipulation
payment is made.
GARNISHMENTOF DBETOR’S CREDIT Art. 1245. Dation in payment, whereby property is alienated to the creditor in
 Proceedin : purpose of subjecting debtor’s payment of debt of another satisfaction of a debt in money, shall be governed by the law of sales. (n)
 Specie of attachment by means of which the plaintiff seeks to subject SPECIAL FORMS OF PAYMENT
his claim the property of defendant in the hands of third person 1) Dacion in payment
(garnishee) or money owed by such third person to defendant 2) Application of payments
 In a nature of an involuntary novation by substitution of one creditor of 3) Payment by cession
another 4) Tender of payment
 Consists in the citation of some stranger to the litigation who is debtor MEANING OF DATION IN PAYMENT
to one of the parties in action.  Conveyance of ownership of thing by the debtor to creditor as an
 Require: pa debt no to his former creditor but to the new creditor who is accepted equivalent of performance of the monetary obligation
creditor in the main litigation  Special form of payment ; not an ordinary way of extinguishing
obligation
 EXTINGUISHMENT OF OBLIGATIONS
A.REGADO

 Conveyance of ownership (thing) = Performance of a monetary TRANSMISSION OF OWNERSHIP TO CREDITOR

obligation (Money)  Delivery + Transmission of ownership to the creditor
REQUISITES OF DATION IN PAYMENT  Creditor Accepts it as payment for the outstanding debt
1) Performance of prestation in lieu of payment  (x) security, mortgage because the purpose of which is not to transfer
2) Difference of thing due and which is given in substitution ownership
3) Agreement between Creditor & Debtor : Extinguished by reason of
performance of prestation is different from what is due. Art. 1246. When the obligation consists in the delivery of an indeterminate or
NATURE OF DATION IN PAYMENT generic thing, whose quality and circumstances have not been stated, the
 Specie of sale : creditor is really buying thing/property creditor cannot demand a thing of superior quality. Neither can the debtor
 Payment is charged against the debt deliver a thing of inferior quality. The purpose of the obligation and other
 Objective novation of obligation : extinguishes debt to the extent of circumstances shall be taken into consideration. (1167a)
value of thing (with intent of parties) RULE ON MEDUIUM QUALITY
GOVERNING LAW  This applies when there is delivery of an indeterminate or generic thing
 Law on sales governs because dation in payment may be considered as a and quality and circumstances (x) stated
specie of sale in whch the amount of money debt becomes the price of  Creditor (x) Demand Superior Quality
thing alienated.  Debtor (x) Deliver thing of inferior quality
 Essential elements of a contract must be present (COC)  Principle of equty supplies justice, law determines compliance
 There is an objective novation of obligation where thing is offered as an WAIVER OF THE BENEFIT OF HIS ARTICLE
accepted equivalent of the performance of an obligation is considered (1) Acceptance of inferior quality
the object of contract of sale while debt is considered as the purchase (2) Delivery of Superior Quality
price.
Art. 1247. Unless it is otherwise stipulated, the extrajudicial expenses required
 Common consent is an essential pre-requisite
by the payment shall be for the account of the debtor. With regard to judicial
SALE DATION IN PAYMENT
costs, the Rules of Court shall govern. (1168a)
No pre-existing credit pre-existing credit
Obligations : created Obligations extinguished DEBTOR PAYS FOR EXTRAJUDICIAL EXPENSES
Cause of price paid from the view Extinguishment of debt from the  Because it is the debtor who is benefited
point of seller, or acquisition of viewpoint of debtor or acquisition of  Costs : Rules of Court
thing sold from view point of buyer object in lieu of credit, from  This does not apply to expenses incurred by the creditor in going to
viewpoint of creditor debtor’s domicile to collect
More freedom in fixing price Less LOSING PARTY GENERALLY PAYS
Buyer has still to pay price Payment is received before the
 Judicial costs : Statutory amounts allowed to party to an action for his
contract is perfected which is to be
expenses incurred in the action
charged against the debtor’s debt
Parties deliver and receive things as Debtor and Creditor  Costs of an action as a rule, shall be paid by the losing party
seller and buyer
 EXTINGUISHMENT OF OBLIGATIONS
A.REGADO

 Court may however for special reasons adjudge that either party shall Art. 1249. The payment of debts in money shall be made in the currency
pay the costs or that same shall be divides as may be equitable stipulated, and if it is not possible to deliver such currency, then in the
 No costs are allowed against the government unless otherwise provided currency which is legal tender in the Philippines.
by law The delivery of promissory notes payable to order, or bills of exchange or other
Art. 1248. Unless there is an express stipulation to that effect, the creditor mercantile documents shall produce the effect of payment only when they
cannot be compelled partially to receive the prestations in which the have been cashed, or when through the fault of the creditor they have been
obligation consists. Neither may the debtor be required to make partial impaired.
payments. In the meantime, the action derived from the original obligation shall be held
However, when the debt is in part liquidated and in part unliquidated, the in the abeyance. (1170)
creditor may demand and the debtor may effect the payment of the former PAYMENT OF DEBTS IN MONEY PAYALE IN PH CURRENCY
without waiting for the liquidation of the latter. (1169a)  RA 8183 (1996) : There is no longer any legal impediment to having
obligations or transactions paid in a foreign currency as long as agreed
COMPLETE PERFORMANCE OF OBLIGATION upon by parties
 Provision contemplates obligations where there is only one creditor and MEANING OF LEGAL TENDER
one debtor  Currency which debtor can legally compel a creditor to accept in
 Joint and several obligations are governed by Art 1207 to 1222 payment of debt in money when tender by debtor in the right amount
 Object of prestation must be performed in one act, not in parts LEGAL TENDER IN THE PHILIPPINES
 In order that payment may extinguish an obligation, it is necessary that  All coins and notes of BSP
there be complete performance of prestation  Above 1.00
 Creditor may accept bu he cannot be compelled to accept partial PAYMENT BY MEANS OF INSTRUMENTS OF CREDIT
payment (1) Right of creditor to refuse or accept – PN, C, BOE, CD (x) legal tender
 The debtor has the duty to comply with the whole obligation but he  Acceptance not = payment
cannot be required to make partial payments if he does not wish to do  Demandabilty is merely suspended
so  Art 1245 : applicable where there is a payment of judgment obligation
WHEN PARTIAL PERFORMANCE OF OBLIGATION IS ALLOWED (2)Payment for the purpose of redemption
1. Stipulation not rendered invalid by the fact that payment to sheriff for the purpose of
2. Partly liquidated, partly unliquidated redemption is effected by means of a check for the amount due
3. Different prestations in which obligation consists are subject to ART 1249 RIGHT TO REDEEM
different terms and conditions which affect some of them Mode of extinction of debts Not an obligation but the exercise of
4. Parties know that obligation reasonably cannot be expected to be right nor is it intended to discharge
a pre-existing debt
performed completely at one time
Not to be applied where what Policy of law : aid rather than to
5. Abuse of right or if good faith requires acceptance
applies is the settled rule that mere defeat right to redemption
tender of checks is sufficient to
compel redemption
 EXTINGUISHMENT OF OBLIGATIONS
A.REGADO

EFFECTS OF OBLIGATION NEED FOR STIPULATTION TO CONSIDER THE EFFECTS OF

 Payment means of mercantile documents does not extinguish EXTRAORDINARY INFLATION OR DEFLATION
obligation 1. Where contractual obligation is involved : essential ; only applicable
: until they are cashed or unless they have been impaired through the when a contract is involved
fault of creditor 2. Where no contractual obligation is involved –article does not apply
: check is valid for 6 months (sources: quasi-contract, tort, law ,crime)
APPLICABILITY OF IMPAIRMENT CLAUSE OF ART 1249**** BASIS OF PAYMENT IN CASE OF EXTRAORDINARY INFLATION OR
1) Instruments executed by third person or by debtor himself 1249 (2) DEFLATION
applicable  Purchasing value at time of estbalisshment of obligation
2) Only the instruments executed by third person: clause relative to  Burden of proof of extraordinary inflation or deflation is on the part of
impairment of negotiable instruments of negotiable character by fault of party alleging it
creditor applies only to the first class WHEN INFATION OR DEFLATION IS EXRAORDINARY
3) Duty of payee accepting a check: acceptance of check implies due  It requires factual basis of its occurrence :
diligence on the part of the payee ; if no presentment was made, the drawer  It must be uncommon, unforeseen, beyond contemplation at time of
cannot e held liable irrespective of loss or injury sustained by payee establishment of obligation
DEVALUATION DEPRECIATION
Art. 1250. In case an extraordinary inflation or deflation of the currency Official reduction Downward change in value of
stipulated should supervene, the value of the currency at the time of the currency in terms of the other
establishment of the obligation shall be the basis of payment, unless there is currencies of other nations which
an agreement to the contrary. (n) occurs as a result of market forces in
FOREX market
MEANIN OF INFLATION AND DEFLATION
** we apply this
 Inflation : Sharp sudden increase of money or credit or both without
corresponding increase in business transactions –causes drp in value of
Art. 1251. Payment shall be made in the place designated in the obligation.
money There being no express stipulation and if the undertaking is to deliver a
 Deflation: reduction in volume and circulation of the available money determinate thing, the payment shall be made wherever the thing might be at
or credit , resulting in a decline of general price level ; opposite of the moment the obligation was constituted.
inflation In any other case the place of payment shall be the domicile of the debtor.
 Art 1250 provides a just solution for future cases If the debtor changes his domicile in bad faith or after he has incurred in delay,
REQUISITES OF APPLICATION OF ART 1250 the additional expenses shall be borne by him.
1. Official declaration of BSP These provisions are without prejudice to venue under the Rules of Court.
2. Contractual obligation (1171a)
3. Expressly agreed upon: Consider effects of extraordinary inflation PLACE WHERE OBLIGATION IS TO BE PAID
or deflation 1. Place designated
 EXTINGUISHMENT OF OBLIGATIONS
A.REGADO

2. Whereever thing might be at the moment the obligation was 1) Stipulation

constituted (specific thing) 2) Made by Debtor/Creditor to whose benefit the period was
3. Domicile of debtor (Generic thing) constituted
4. Rules of court RULES ON APPLICATION OF PAYMENTS
** if debtor is in bad faith (changing of domicile or delays : add’tl expenses) 1) Debtor : First choice which debt
CONCEPT OF DOMICILE /RESIDENCE - He must indicate at time of making of payment and not
DOMICILE RESIDENCE afterwards which particular debt is being paid
Habitual residence : actual or Requires bodily presence as a 2) Right to make application once exercise is irrevocable unless the
physical presence inhabitant creditor consents to the change
3) Clear from the use of word “may” rather than shall : Not
SUBSECTION 1. – Application of Payments mandatory : merely directory
- If debtor does not apply payment, creditor has the subsidiary
Art. 1252. He who has various debts of the same kind in favor of one and the
right to make the designation
same creditor, may declare at the time of making the payment, to which of
4) Creditor has not also made application/ application is not valid :
them the same must be applied. Unless the parties so stipulate, or when the
most onerous to debtor shall be satisfied
application of payment is made by the party for whose benefit the term has
5) Debt due are of the same nature and burden : apply to all of them
been constituted, application shall not be made as to debts which are not yet
due. proportionately
If the debtor accepts from the creditor a receipt in which an application of the 6) If neither party has exercised its option and there is disagreement
payment is made, the former cannot complain of the same, unless there is a as to debts to which payment must be applied : court shall apply
cause for invalidating the contract. (1172a)  Rules in Art 1252 to 1254pply to person owing several debts of the same
MEANING OF APPLICATION OF PAYMENTS kind to a single creditor
 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 Art. 1253. If the debt produces interest, payment of the principal shall not be
the same creditor deemed to have been made until the interests have been covered. (1173)
 Aling utang babayaran mo INTEREST PAID AHEAD OF PRINCIPAL
REQUISITES OF APPLICATION OF PAYMENTS  Rule in Art 1253 mandatory : Except when there is waiver/agreement to
1. One debtor and one creditor the contrary
2. 2/more debts  Creditor must inform the debtor that payments are applied to the
3. Debt of the same kind interest ; otherwise he is estopped form claiming interest thereafter
4. Debt to which payment made by debtor has been applied : due  Unqualified and unconditional acceptance of settlement without
5. Payment : Not sufficient to cover all debts reservation as to other further claims = estoppel
APPLICATION AS TO DEBTS NOT YET DUE
GR: Apply it to debt due Art. 1254. When the payment cannot be applied in accordance with the
preceding rules, or if application can not be inferred from other circumstances,
 Exceptions
 EXTINGUISHMENT OF OBLIGATIONS
A.REGADO

the debt which is most onerous to the debtor, among those due, shall be  Unless there is a stipulation to the contrary : it shall only release to the
deemed to have been satisfied. extent of the net proceeds of sale
If the debts due are of the same nature and burden, the payment shall be  Therefore if debt amount shall exist after sale, debtor is still liable
applied to all of them proportionately. (1174a) thereof
APPLICATION WHERE PRECEEDING RULES CANNOT BE APPLIED OR ART 1255 REFERS TO CONTRACTUAL ASSIGNMENT
INFERRED  Voluntary/contractual assignment : consent is required (all credtors)
 Most onerous debt  Merely involves change of object of obligation by assignment of parties
 Same Nature and Burden = all proportionately and at the same time the fulfilling f the same voluntarily
INSTANCES : ONEROUS –WHAT TO CONSIDER DATION CESSION
1) Interest bearing One creditor Several creditors
2) Sole> Subsidiary Presupposes the insolvency of Debtor is insolvent at time of
3) Older debtor or a situation of financial assignment
4) Secured by mortgage difficulties
5) Interest rates Does not involve all properties Extends to ALL the properties
Creditor becomes the owner of the Creditor only acquires the right to
6) Penalty clause
thing given by the debtor sell the thing and apply the proceeds
to their credit pro rata
SUBSECTION 2. – Payment by Cession An act of novation Not an act of novation
BOTH are substitute forms of payment or performance
Art. 1255. The debtor may cede or assign his property to his creditors in Governed by law on sales
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 SUBSECTION 3. – Tender of Payment and Consignation
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) Art. 1256. If the creditor to whom tender of payment has been made refuses
MEANING OF PAYMENT BY CESSION without just cause to accept it, the debtor shall be released from responsibility
 Special form of payment by the consignation of the thing or sum due.
 Assignment or abandonment of all the properties of the debtor for the Consignation alone shall produce the same effect in the following cases:
benefit of his creditor; in order that the latter may sell the sae and (1) When the creditor is absent or unknown, or does not appear at the place of
apply the proceeds thereof to the satisfaction of their credit payment
REQUISITES (2) When he is incapacitated to receive the payment at the time it is due;
1) 2/more creditors (3) When, without just cause, he refuses to give a receipt;
2) Debtor: partially insolvent (4) When two or more persons claim the same right to collect;
3) Assignment of all properties (5) When the title of the obligation has been lost. (1176a)
4) Acceptance of cession by creditor TENDER OF PAYMENT
EFFECT OF PAYMENT BY CESSION  An act on the part of DEBTOR of offering t the creditor the thing or
amount due
 EXTINGUISHMENT OF OBLIGATIONS
A.REGADO

 Debtor must show that he has in his possession the thing or mony to be NEESIT OF MAKING TENDER OF PAYMENT AND CONSIGNATION
delivered at time of the offer  Must be validly done to effect extinguishment of obligation
 Preparatory act to consignation : principal  Substantial compliance (X) enough
CONSIGNATION  Law must however be reasonably interpreted and the realities of each
 An act of DEPOSITING the thing or amount due with the proper court case taken into account so that the purpose of law may not be defeated
when the creditor does no desire or refuses to accept payment or  Art 1256 authorizes consignation alone without need of prior tender of
acannot receive it ::: After complying with the formalities required by payment in the 5 instances enumerated
law 1) Creditor : absent/unknown/no appearance
 Necessarily judicial ; generally requires prior tender 2) Incapacitated to receive
NATURE AND RATIONALE FOR CONSIGNATION 3) Refusal without just cause
 A Facultative remedy : which debtor may or may not avail of 4) Two or ore claims the same right to collect
 If made by the debtor Creditor merely accepts it if he wishes or the 5) Title of obligation is lost
court declares that it has been properly made: OBLIGATION IS REQUIREMENT TO A VALID TENDER OF PAYMENT
EXTINGUISHED  Definite act of offering
 May be withdrawn before acceptance  Compliance with the rules on payments
 IF debtor has such right of withdrawal he has right to refuse to make  Unconditional & must involve the whole amount
deposit; court cannot compel him to do so  Actually made
 If he refuses, creditor must :: use proper process provided by law to  However, good faith of the offeror and the aulity to make ggood the
secure his credit offer should in simple justice excuse the debtor from paying interest
 An avoidance of greater liability (damages; interests; penalties) EFFECT OF TENDER EFFECT OF CONSIGNATION
 Failure to consign is not tantamount to breach of contract where by the Exempts : liability from interests Effects : payment : extinguishes the
fact of tendering payment : willing and able to comply with his obligation
obligation PROOF OF TENDER OF PAYMENT
 Good faith of offeror or ability to make good offer : justice :: excuse ::  Precede consignation
payment of interest  Proved
 Technical defects of offer canot be adduced to destroy its effects when  Prior Notice to interested persons is sufficient
the obligation to accept payment was based on entirely different
grounds Art. 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
REQUISITES OF A VALID CONSIGNATION
of the obligation.
1) Valid debt (debtor-creditor rel: must exist)
The consignation shall be ineffectual if it is not made strictly in consonance
2) Tender of payment or refusal to accept : C
with the provisions which regulate payment. (1177)
3) Previous notice of consignation
PRIOR NOTICE TO INTERESTED PERSONS IS REQUIRED
4) Consignation in proper court
5) Subsequent notice that a consignation has been made
 EXTINGUISHMENT OF OBLIGATIONS
 Who are persons interested : guarantors, mortgagors, solidary debtors
and creditors
 Purpose: give chance (creditor) to reflect on prior refusal since he will
be charge for the costs of consignation, and bears risk of loss of thing
consigned
 Not mere warning : it must contain a fixed date and hour
 Tender of payment and consignation may be done in a same act
CONSIGNATION MUST COMPLY WITH THE PROVISIONS ON PAYMENT
 Made in legal tender
 While the approval of court or the obligee’s acceptance of the deposit is
not necessary where obligor has performed all the acts necessary to a
valid consignation such that court approval thereof (x) doubted
TENDER OF PAYMENT OF JUDGMENT
 Due on judicial court (art 1156 and art 1157 applies
 In case of refusal of tender of payment of a judgment, the court may
direct the money to be paid into court and after this payment is done,
order the satisfaction of the judgment to be entered
Art. 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)
HOW CONSIGNATION IS MADE
 Must be made with proper judicial authority : effect payment ----
cannot be made elsewhere unless prescribed by special law
 Written tender of payment alone w/o consignation in court of sum due
does not suspend the accruing of regular or monetary interests; it must
be accompanied/followed by a consignation
 Where an obligor however fails to make a consignation after a valid
tender; court may allow him time to pay obligation without rescinding
the contract
 It has a retroactive effect : made at time : deposit was made
A.REGADO
 Notice to be given t interested parties of consignation made: summons
upon defendant with copy of complaint
 Pupose: creditor could make withdrawal or take possession
 CONSIGNATION IS APPLICABLE ONL TO PAYMENT OF EBT
(MONETARY)
 Consignation is not necessary in case where privilege or ight (mere
tender of payment : sufficient)
 Property deposited in court is exempt from attachment : custodial
egis—cannot be withdrawn
Art. 1259. The expenses of consignation, when properly made, shall be charged
against the creditor. (1178)
LIABILITY OF CREDITOR FOR EXPENSES OF CONSIGNATION
 Unjust refusal of creditor :: expenses should be charged against im
 Expenses are chargeable to debtor if consignation is not properly made
WHEN CONSIGNATION IS DEEMED PROPERLY MADE
1) Creditor accepts the thing or sum deposited without objection
2) Creditor questions the validity of consignation and court after
hearing declares that it has been properly made
3) Creditor neither accepts nor questions the validity of consignation
and the court after hearing orders the cancellation of obligation
Art. 1260. Once the consignation has been duly made, the debtor may ask the
judge to order the cancellation of the obligation.
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. (1180)
WHEN DEBTOR MAY WITHDRAW
1. Before judicial declaration of consignation
2. Before creditor has accepted
 Withdrawal as a matter of right
- In case of withdrawal the obligation is still in force
 EXTINGUISHMENT OF OBLIGATIONS
A.REGADO

- If with consent of creditor, he shall lose his preference (art

1261 applies)
 Need for a judicial order of restitution mad eby a proper court
- Formal complaint must be commenced with the proper court
to provide venue for the determination of whetehr there was a
valid tender of payment or consignation
RISK OF LOSS OF THING OR SUM CONSIGNED
 For the account of creditor
- All requisites for a valid consignation has been made
- Without fault of debtor
- Before acceptance of consignation or approval by court
 For accont of debtr
- Before acceptance by creditor or approval by court is mutual
- Where there is no valid consignation: loss must be suffered by
debtor

Art. 1261. 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.
(1181a)
EFFECT OF WITHDRAWAL WITH AUTHORITY OF CREDITOR
 Consignation exists for the benefit of creditor
 He may authorize the debtor to withdraw his deposit after he has
accepted or after court issued an order cancelling obligation
AS FAR AS DEBTOR AND CREDITOR IS CONCERNED
 Relations will remain as they were before acceptance or cancellation
 Co-debtors, guarantors, and sureties shall be released
SOLIDARY DEBTORS ARE RELEASED ONLY FROM THEIR SOLIDARY
LIABILITY
 Not from their shares of obligation since unlike guarantors and sureties
::: they are principal debtors