OBLIGATIONS AND CONTRACTS CIVIL LAW

V. EXTINGUISHMENT OF
OBLIGATIONS a. Payment or Performance

A. MODES OF EXTINGUISHING i. Definition

The delivery of money OR the performance of
OBLIGATIONS [Par. 1, Article 1231,
obligation in any other manner [Article 1232,
Civil Code] (P-L-C3-N)
Civil Code]

a. By Payment or performance
ii. Object of Payment
b. By the Loss of the thing due;
c. By the Condonation or remission of the
debt; Integrity of Prestation
d. By the Confusion or merger of the rights General Rule
of creditor and debtor; A debt shall be understood to have been paid
e. By Compensation; when the thing or service in which the obligation
f. By Novation consists has been completely delivered or
rendered [Article 1233, Civil Code]. Partial or
B. OTHER MODES OF EXTINGUISHING irregular performance will not produce the
extinguishment of an obligation as a general
OBLIGATIONS [Par. 2, Article 1231,
rule.
Civil Code] (P-A-R-F)
Exceptions
1. When the obligation has been substantially
a. By Annulment
performed in good faith [Article 1234, Civil
b. By Rescission
Code]
c. By Fulfillment of a resolutory condition
d. Prescription
Requisites of substantial performance
a. Attempt in good faith to perform without
C. OTHER FORMS OF
willful or intentional departure;
EXTINGUISHMENT NOT FOUND IN
b. Deviation is slight;
ARTICLE 1231
c. Omission or defect is unimportant; and
d. Must be not so material that intention of
a. Death of one of the contracting parties
the parties is not attained [International
in personal obligations [Article 1311(1),
Hotel Corporation v. Joaquin, G.R. No.
Civil Code]
158361 (2013)]
b. Will of one of the contracting parties
c. Renunciation or Waiver by the creditor
2. When the obligee accepts the performance
d. Mutual Desistance or withdrawal [Saura
despite its incompleteness or irregularity and
Import & Export Co. v. DBP, G.R. No. L-
without expressing any protest or correction
24968 (1972)]
[Article 1235, Civil Code]
e. Happening of a fortuitous event [Article
1174, Civil Code]
Identity of Prestation
f. Compromise [Article 2028, Civil Code]
g. Impossibility of fulfillment [Arts. 1184 &
1266, Civil Code] General Rule
h. Expiration of resolutory term or period For obligations to give: The same thing or
[Article 1193(2), Civil Code] the same prestation, in the manner agreed

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 OBLIGATIONS AND CONTRACTS CIVIL LAW

upon, must be delivered or performed. The 3. When the nature of the obligation is
debtor cannot compel the creditor to receive a susceptible to partial fulfillment (e.g. there
different one, although the latter may be of the are different prestations with different terms
same value as, or more valuable than that which and conditions, or the obligation cannot be
is due [Article 1244(1), Civil Code]. performed at one time)

For obligations to do or not to do: An act or iv. By whom

forbearance cannot be substituted by another
act or forbearance against the obligee's will Payor must have:
[Article 1244(2), Civil Code]. 1. free disposal of the thing due, and
2. capacity to alienate it [Article 1239, Civil
Exceptions to Article 1244, Civil Code: Code].
1. If the obligation is facultative [Article
1206, Civil Code] Free disposal of the thing due means that the
2. When the creditor agrees to a dation in thing to be delivered must not be subject to any
payment [Article 1245, Civil Code] claim or lien or encumbrance of a third person.
3. When obligee accepts incomplete or Capacity to alienate means that the person is
irregular performance without any not incapacitated to enter into contracts [Arts.
protest → obligation deemed fully complied 1327 &1329, Civil Code].
with [Article 1235, Civil Code].
4. If there is substantial performance by However, when a minor between eighteen (18)
debtor → The obligor may recover as and twenty-one years (21) of age entered into a
though there had been a strict and complete contract without the consent of the parent or
fulfillment, less damages suffered by the guardian, and voluntarily pays a sum of money
obligee [Article 1234, Civil Code] or delivers a fungible thing in fulfillment of the
obligation, there shall be no right to recover the
iii. Necessity of Complete same from the obligee who has spent or
Performance [Article 1248, consumed it in good faith. [Article 1427, Civil
Civil Code] (CD) Code].

General Rules Payor may either be:

1. The Creditor cannot be compelled partially 1. The debtor or his duly authorized agent
to receive the prestations in which the 2. The debtor’s heir or successor in interest
obligation consists. 3. A third person interested in the fulfillment of
2. The Debtor may not be required to make the obligation (i.e. codebtor, guarantor,
partial payments surety, owner of mortgaged property or
pledge) whether the debtor consents to it or
not, and even without debtor’s knowledge
Exceptions
[Article 1302, Civil Code]. This includes
1. There is an express stipulation that permits
payment by a joint debtor [Monte de Piedad
partial performance
y Caja de Ahorros de Manila v. Rodrigo, G.R.
2. When the debt is in part liquidated and in
part unliquidated, the creditor may demand No. L- 42928 (1936)] but not a solidary
and the debtor may effect the payment of codebtor.
the former without waiting for the
liquidation of the latter

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Effects of payment by interested third legally subrogated creditor to subrogate

person [Art. 1302, Civil him on his rights [Art.
a. Obligation is extinguished; Code]. 1237, Civil Code].
b. Debtor should fully reimburse the interested
third person; Reimbursement and Subrogation
c. The interested third person is subrogated to
Distinguished
the rights of the creditor [Art 1302(3)].
Reimbursement Subrogation
4. A third person not interested in the
Personal action to Includes
obligation. However, the creditor is not
recover amount paid reimbursement, but
bound to accept payment by him, unless also the exercise of
there is a stipulation to the contrary [Article other rights attached
1236, Civil Code]. to the original
obligation (e.g.
Payment by a third person not guaranties, securities)
interested in the fulfillment of the
obligation Payment made by a third person who does
General Rule not intend to be reimbursed by the debtor
The creditor is not bound to accept payment or is deemed to be a donation, which requires
performance by a third person who has no the debtor’s consent. But the payment is in any
interest in the fulfillment of the obligation case valid as to the creditor who has accepted it
[Article 1236, Civil Code] [Article 1238, Civil Code].
v. To whom
Exceptions
1. Stipulation to the contrary [Article 1236, 1. Payment shall be made to:
Civil Code] a. The person in whose favor the
2. With consent of debtor [Article 1302(2)] obligation has been constituted; or
b. His successor in interest; or
c. Any person authorized to receive it
Reimbursement for Payment Made by a [Article 1240, Civil Code]
Third Person
2. Payment to a person who is
The third party The third party incapacitated to administer his
pays with the pays without the property shall be valid if:
consent of the knowledge or a. He has kept the thing delivered, OR
debtor consent of the b. Insofar as the payment has been
debtor beneficial to him [Article 1241(1), Civil
Code].
The third party may The third party may
claim reimbursement only claim insofar as 3. Payment made to a third person may
for the full amount the payment has also be valid
[Art. 1236(2), Civil been beneficial to the a. Insofar as it has redounded to the
Code]. debtor [Art. 1236(2), benefit of the creditor
Civil Code]. b. Proof that such payment has redounded
to the benefit of the creditor is required.
The third party is The third party
presumed to be cannot compel the c. When payment is made to the wrong
party, the obligation is not extinguished

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 OBLIGATIONS AND CONTRACTS CIVIL LAW

as to the creditor who is without fault or vii. Time of Payment

negligence even if the debtor acted in
utmost good faith and by mistake as to General Rule
the person of the creditor or through Upon demand
error induced by fraud of a third person
[Allied Banking Corp. v. Lim Sio Wan, Exceptions
G.R. No. 133179 (2008)]. 1. When time is of the essence
2. When the debtor loses the benefit of the
Exceptions to the requirement of proof period
of benefit: 3. When the obligation is reciprocal
a. Subrogation: if after the payment, the
third person acquires the creditor’s rights; viii. Form of Payment
b. Ratification: if the creditor ratifies the
payment to the third person; General Rule
c. Estoppel: if by the creditor’s conduct, the Payment must be made in the currency
debtor has been led to believe that the third stipulated
person has authority to receive the payment
[Article 1241, Civil Code]; Legal Tender
d. Payment made in good faith to any
Such currency which in a given jurisdiction can
person in possession of the credit shall
be used in the payment of debts, and which
release the debtor [Article 1242, Civil Code]
cannot be refused by the creditor.

4. In case of active solidarity

When payment is not in legal tender
a. The debtor may pay any one of the
solidary creditors. General Rule
b. But, if any demand, judicial or The creditor may refuse to accept payment (e.g.
extrajudicial, has been made by one of checks) not made in legal tender [Philippine
them, payment should be made to him. Airlines v. CA, G.R. No. L-49188 (1990)].
[Article 1214, Civil Code] Checks representing demand deposits do not
have legal tender power and their acceptance in
vi. Place of Payment the payment of public and private debts is at the
creditor’s option [Sec. 60, R.A. No. 7653].
1. In the place designated in the
If the creditor accepts the check or no prompt
obligation.
objection to the form of payment is made, there
2. In the absence of stipulation and if the
is a valid tender of payment and credit can no
obligation is to deliver a determinate thing:
longer claim later that payment is not in legal
Wherever the thing might be at the
tender. While it is true that in general, a
moment the obligation was
manager’s check is not legal tender, the creditor
constituted.
has the option of refusing or accepting it.
3. In any other case: domicile of debtor
[Pabugais v. Sahijwani, G.R. No. 156846 (2004)]
[Article 1251, Civil Code]

Generally, when payment in check is accepted, it

produces the effect of payment only when the
check is cleared and the funds are transferred to

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the account of the creditor [Sec. 60, R.A. No. Extraordinary Inflation or Deflation
7653]. However, the subsequent failure to Requires Judicial Determination
encash the check within a period of ten (10) The supervening of extraordinary inflation is
years or more, will have the effect of payment never assumed. The party alleging it must lay
[Evangelista v. Screenex, Inc., G.R. No. 211564 down the factual basis for the application of
(2017)]. Article 1250, Civil Code. The effects of
extraordinary inflation are not to be applied
The delivery of promissory notes payable to without an official declaration by competent
order, or bills of exchange or other mercantile authorities and the only competent authority so
documents shall produce the effect of payment far recognized by this Court to make such an
only when: official proclamation is the BSP [Citibank v.
1. they have been cashed, or Sabeniano, G.R. No. 156132 (2007)].
2. through the fault of the creditor they have
been impaired [Article 1249(2), Civil Code]. 1. Application of Payments

Extraordinary Inflation or Deflation Requisites

In case an extraordinary inflation or deflation of If there is plurality of debts, the debtor, at the
the currency stipulated should supervene → the time of payment, may declare to which of the
value of the currency at the time of the debts the payment must be applied, provided:
establishment of the obligation shall be the 1. Debts are of the same kind;
basis of payment. 2. Debts are owed to the same creditor and
by the same debtor;
Exception 3. All debts are due, UNLESS parties so
There is an agreement to the contrary [Article stipulate, or when application is made by
1250, Civil Code]. the party for whose benefit the term has
been constituted; and
Requisites for application of Article 4. Payment made is not sufficient to cover
1250, Civil Code all debts [Article 1252, Civil Code].
1. Official declaration of extraordinary inflation
of deflation from the BSP Rules on Application of Payments
2. Obligation is contractual in nature 1. Preferential right of debtor - debtor has
3. Parties expressly agreed to consider the the right to select which of his debts he is
effects of extraordinary inflation or deflation paying
[Equitable PCI Bank v. Sheung Ngor, G.R. 2. The debtor makes the designation at
No. 171545 (2007)] the time he makes the payment.
3. Unless the parties so stipulate, or when the
Even if the price index of goods and services application of payment is made by the party
may have risen during the intervening period, for whose benefit the term has been
this increase, without more, cannot be constituted, application shall not be
considered as resulting to "extraordinary made as to debts which are not yet
inflation" as to justify the application of Article due. [Article 1252, Civil Code].
1250, Civil Code [Telengtan & Sons, Inc. v. 4. If not, the creditor makes the
United States Lines, G.R. No. 132284 (2006)]. application, by so stating in the receipt
that he issues, unless there is cause for
invalidating the contract.

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5. If neither the creditor nor debtor exercises Limitations

the right to apply, or if the application is not 1. Creditor may refuse partial payment [Article
valid, the application is made by operation 1248, Civil Code]
of law. 2. Payment of principal not yet made if interest
has not been covered [Article 1253, Civil
Note: The court will apply the payment Code]
according to the justice and equity of the 3. Debtor cannot apply payment to a debt
case, taking into consideration all its which is not yet liquidated [Article 1252(1),
circumstances [Premiere Development Bank Civil Code].
v. Central Surety, G.R. No. 176246 (2009)]. 4. He cannot choose a debt with a period
(established for the creditor’s benefit) before
6. If debt produces interest, the payment the period has arrived [Ibid].
of principal is not deemed to have been
made unless the interests are covered 2. Dation in Payment
[Article 1253, Civil Code].
7. When no application can be inferred Definition
from the circumstances of payment, it is Property is alienated to the creditor in
applied: satisfaction of a debt in money [Article 1245,
a. to the most onerous debt of the Civil Code]
debtor; or
b. if debts due are of the same nature and
burden, to all the debts in proportion Requisites
[Article 1254, Civil Code]. 1. Existence of a money obligation
8. Rules on application of payment may not 2. Alienation to the creditor of a property by
be invoked by a surety or solidary the debtor with the creditor’s consent
guarantor. 3. Satisfaction of the money obligation

Exceptions Special form of payment where the debtor

1. Rules on application of payment apply to a assigns/abandons ALL his property for the
person owing several debts of the same kind benefit of his creditors in order that from the
to a single creditor. They cannot be made proceeds thereof, the latter may obtain payment
applicable to a person whose obligation as a of their credits [Article 1255, Civil Code].
mere surety is both contingent and singular.
There must be full and faithful compliance Requisites
with the terms of the contract [Reparations 1. There is a plurality of debts
Commission v. Universal Deep-Sea Fishing 2. There is a plurality of creditors
Corp., G.R. Nos. L-21901 and L-21996 3. Partial or relative insolvency of debtor
(1978)]. 4. Acceptance of the cession by the
2. The debtor’s right to apply payment can be creditors
waived and even granted to the creditor if 5. Debtor is released only for the net
the debtor so agrees [Premiere proceeds unless there is a stipulation to
Development v. Central Surety, G.R. No. the contrary [Article 1255, Civil Code].
176246 (2009)].

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Remedy if Creditors Refuse Cession Tenders of payment, in order to be valid, must

There will be a proceeding in accordance with be made in the lawful currency. The tender of
the FRIA such that all of the assets of an a check to pay for an obligation is not a valid
insolvent debtor are pooled then sold for the tender of payment thereof [Soco v. Militante,
benefit of the creditors [R.A. No. 10142]. G.R. No. L-58961 (1983)].

Cession and Dation Distinguished b. Consigation

Deposit of the object of obligation in a
Cession Dacion en Pago
competent court in accordance with the rules
Plurality of creditors One creditor prescribed by law whenever the creditor unjustly
refuses payment or because of some
Debtor must be Debtor not circumstances which render direct payment to
partially or relatively necessarily in state of the creditor impossible or inadvisable [Spouses
insolvent financial difficulty
Bontostro v. Spouses Luna, G.R. No. 172346
Universality of Thing delivered is (2013)].
property is ceded equivalent of
performance ii. Requisites of Consignation
Merely releases Extinguishes
1. There is a debt due;
debtor for the net obligation to the
proceeds of things extent of the value of 2. Consignation is made because of some
ceded or assigned, the thing delivered, legal cause:
unless there is as agreed upon, a. There was tender of payment and
contrary intention proved or implied creditor refuses without just cause to
from the conduct of accept it
the creditor
b. Instances when consignation alone
Involves all properties Does not involve all would suffice as provided under Article
of debtor properties of debtor 1256, Civil Code
3. Previous notice of consignation was given
Creditor does not Creditor becomes to those persons interested. Previous notice
become owner of the owner is essential to the validity of the
ceded property
consignation and its lack invalidates the
same [Soco v. Militante, supra] (1st notice)
3. Tender of Payment and 4. Actual deposit/consignation with proper
Consignation judicial authority
5. After the consignation has been made, the
i. Definitions persons interested were notified thereof
(2nd notice) [Art 1258(2), Civil Code]
a. Tender of payment
Manifestation made by the debtor to the Tender of Payment and Consignation
creditor of his desire to comply with his Distinguished
obligation, with offer of immediate
Tender of Payment Consignation
performance [Del Carmen v. Sps. Sabordo,
G.R. No. 181723 (2014)]. Manifestation made Deposit of the object
by the debtor to the of obligation in a
creditor of his desire competent court in

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the Civil Code cannot apply [Llobrera v.

to comply with his accordance with the
obligation, with offer rules prescribed by Fernandez, G.R. No. 142882 (2006)].
of immediate law whenever the
performance. creditor unjustly iv. What Constitutes Valid
refuses payment or Consignation
because of some
circumstances which
render direct In order that the consignation of the thing due
payment to the may release the obligor, it must first be
creditor impossible or announced to the persons interested in
inadvisable. the fulfilment of the obligation. The
consignation shall be ineffectual if it is not made
Antecedent or Principal act
strictly in consonance with the provisions which
preparatory act
regulate payment [Article 1257, Civil Code].
Extrajudicial Judicial
v. How Consignation Is Made
Both Tender and Consignation Needed
Consignation shall be made by depositing the
To Produce Effect of Payment
things due at the disposal of judicial
To have the effect of payment and the
authority, before whom the tender of payment
consequent extinguishment of the obligation to
shall be proved, in a proper case, and the
pay, the law requires the companion acts of
announcement of the consignation in other
tender of payment and consignation. Tender of
cases. The consignation having been made, the
payment without consignation only frees the
interested parties shall also be notified thereof
debtor from the obligation to pay interest on the
[Article 1258, Civil Code].
amount due from the time the unjustified refusal
takes place [Go Cinco v. CA, G.R. No. 151903
vi. Who Bears the Expenses
(2009)].

The expenses of consignation, when properly

iii. When tender and refusal not
made, shall be charged against the creditor
required / Consignation
[Article 1259, Civil Code].
alone is sufficient [Article
1256, Civil Code] vii. Effects of Consignation

a. Creditor is absent or unknown, or does If accepted by the creditor or judicial declaration

not appear at the place of payment; by the Court that consignation is properly made:
b. Creditor is incapacitated to receive the 1. Debtor is released in same manner as if
payment at the time it is due; he had performed the obligation at the time
c. When without just cause, creditor of consignation
refuses to give receipt; 2. Accrual of interest is suspended from
d. Two or more persons claim the same the moment of consignation
right to collect (i.e. Interpleader); 3. Deterioration or loss of the thing or
e. Title of the obligation has been lost. amount consigned, occurring without the
fault of debtor, must be borne by creditor
Unless there is an unjust refusal by a creditor to from the moment of deposit
accept payment from a debtor, Article 1256 of

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