Meaning to put an end on an obligation

Provisions Governing
Extinguishment of obligations is
from Articles 1231 to 1304
 Obligations are extinguished by: (Enumeration under Article 1231
of the Civil Code)
a) Payment or performance
b) Loss of the thing due
c) Condonation or remission
d) Confusion or merger of rights of the creditor and debtor
e) Compensation
f) Novation
Other causes of extinguishment of obligations are (h) annulment,
(I) rescission, (j) fulfillment of a resolutory condition and (k)
prescription. The following are found in other chapters of the
Civil Code.
Other forms of Extinguishment of the obligation
a)Death of a party in case the obligation is personal
b)Mutual desistance or withdrawal from contract or
agreement
c)Compromise -Under Article 2028 of the Civil Code,
a compromise is a contract whereby the parties, by
making reciprocal concessions, avoid a litigation or
put an end to one already commenced.
Accordingly, a compromise is either judicial, if the
objective is to put an end to a pending litigation, or
extrajudicial, if the objective is to avoid a litigation.
As a contract, a compromise is perfected by
mutual consent.
Art. 1232. Payment means not only the
delivery of money but also the performance, in
any other manner, of an obligation.
Payment (ART.1232-1261) – means
not only the delivery of money but
also the giving of the thing (other
than money), performance referring
to the doing and not doing of an act ,
in any other manner, of an obligation.

It payment and performance are

synonymous.
 Payment / Performance
Delivery of money and performance, in any other
manner of the obligation

Requisites for Valid Payment / Performance

With respect to the prestation
• Identity
• Integrity or completeness
• Indivisibility
Art. 1233. 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.
General Rule: Completeness of Payment. Payment should
be complete. (Art. 1233)
Exceptions:
• Recovery allowed in case of substantial performance in
good faith. (Art. 1234)
• Recovery allowed when incomplete or irregular
performance is waived. (Art.1235)
 Instances when partial performances are
allowed. (Art. 1248)
• when there is an express stipulation to that
effect.
• When the debt is partly liquidated (definitely and
determined or computed) and in partly
unliquidated.
• When the prestations in which the obligation
consists are subject to different terms or
conditions which affect some of them.
Art. 1234. If the obligation has been substantially performed
in good faith, the obligor may recover as though there had
been a strict and complete fulfillment, less damages suffered
by the obligee.

Requisites:
a. Substantial Performance
b. Performance in good faith

Note: Less damages suffered by the creditor.

Substantial Performance
Effect of Substantial Performance in Good Faith
• Obligor may recover as though there has been
strict and complete fulfillment, less damages
suffered by the oblige
• Right to rescind cannot be used for slight breach
Art. 1235. When the obligee accepts the performance,
knowing its incompleteness or irregularity, and without
expressing any protest or objection, the obligation is
deemed fully complied with.

• Attempt in Good Faith to perform without willful or

intentional departure
• Deviation is slight
• Omission/Defect is technical or unimportant
• Must not be so material that intention of parties is not
attained.
Art. 1236. 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)

Art. 1237. Whoever pays on behalf of the debtor without the knowledge
or against the will of the latter, cannot compel the creditor to subrogate
him in his rights, such as those arising from a mortgage, guaranty, or
penalty.
Requisites for Valid Payment
• With respect to parties - must be made by proper party to
proper party
PAYOR
a. Payor - the one performing, he can be the debtor himself or
b. his heirs or assigns or his agent,
c. or anyone interested in the fulfillment of the obligation; can
be anyone as long as it is with the creditor's consent
d. Authorized by the debtor pay in his behalf
Requisites for Valid Payment
Third person cannot compel the creditor to accept
payment or performance of an obligation except:
a) When it is made by a third person who has interest
in the fulfillment of the obligation;

b) When there is a stipulation to the contrary

(Art.1236, CC). In this case, the creditor waives his
right to refuse to deal with strangers to the obligations.
If stranger or 3rd person pays/performs - only the creditor's
consent is required; If performance is done also without
debtor's consent – PAYING STRANGER OR THIRD PERSON IS
ENTITLED OF BENEFICIAL REIMBURSEMENT ONLY. - he can
recover only insofar as the payment has been beneficial to
the debtor.

If a third person pays an obligation with the knowledge

and consent of the debtor he can recover from the debtor
the entire amount, which he has paid (reimbursement) and
he is subrogated of all the rights of the creditor.
Subrogation of the rights, such as those arising from a
mortgage, guaranty or penalty (Art. 1237).
Illustration:
• D borrowed P10,000 from C with G as guarantor.
Subsequently, D paid C P 2,000. Unknown to D, T a
third person paid C P10,000 believing that D still
owed C such amount. What is the legal effect of the
payment by T?
* T can recover P8,000 from D, the law provides
that only the amount to which the creditor has
benefited could be reimbursed to the third person
paying if the payment was without knowledge of the
creditor. If D cannot pay, T cannot go after G to collect.
(1236)
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.

D owes C P10,000. T offers to pay D’s obligation and tells D that D need
not reimburse him. However, D does not give his consent to T’s offer
not to be reimbursed. C, nonetheless, accepts the payment from T. Was
the payment valid?
* The payment is valid insofar as C is concerned. The case is
deemed to be a donation, however to be constituted as such D’s
consent is necessary. (1238)
Art. 1239. In obligations to give, payment made by one who does not
have the free disposal of the thing due and capacity to alienate it
shall not be valid, without prejudice to the provisions of Article 1427
under the Title on "Natural Obligations.“
Qualifications of debtor with obligation to give to cause extinguish
the obligations:
1. Free disposal of the thing due means that the thing to be delivered
must not be subject to any claim or lien or encumbrance of a third
person.
2. Capacity to alienate means that the person is not incapacitated to
enter into a contract and for that reason, to make a disposition of the
thing due.
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.
Person to whom payment shall be made.
Rule: Payment made to persons other than the following shall not
be valid: Hence, debtor can be required to pay again
a. Creditor
b. His successor in interest
c. Person authorized to receive it.
- It refers to both authorized by the creditor or
- authorized by the court such as the guardian, executor or
administrator of the estate)
PAYEE
• Payee - creditor or obligee or successor in interest of
transferee, or agent
Note: The creditor or oblige must be the creditor at the
time of payment and not the creditor at the time the
obligation was constituted.
• 3rd person - if any of the ff. concur:
• It must have redounded to the obligee's
• benefit and only to the extent of such benefit
• It falls under art 1241, par 1,2,3 - the benefit is total so,
performance is total
• Anyone in possession of the credit - but will apply only
if debt has not been previously garnished
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.
Payment

Payment made to an Incapacitated

Person, VALID if:
• Incapacitated person kept the thing
delivered, or
• Insofar as the payment has been
beneficial to him
 Payment
PAYMENT TO 3RD PARTY NOT AUTHORIZED, VALID IF PROVED AND ONLY
TO THE EXTENT OF BENEFIT; PRESUMED IF
1. After payment, 3rd person acquires the creditor’s rights -
Subrogation of the payer in the creditor’s right).
Example: D executed a promissory note amounting to
Php 50,000 payable to C. On due date, D made the
payment to T. Thereafter C assigned the note to T. In
this case, D need not prove that C was benefited from
payment because T acquired C’s rights after payment is
made.
 Payment
2. Creditor ratifies payment to 3rd person - Ratification by
the creditor –
D owed C Php 10,000. On due date, D made the
payment to N, a neighbor of C. When C learned that D
made the payment to N, C told D that he was approving
and confirming the payment that had been made.
3. By creditor’s conduct, debtor has been led to make
the payment (estoppel on the part of the creditor)
Meralco case (Landmark case)
D obtained a loan of P10,000 from C who was in his
right mind at the time he granted the loan. On due
date, D paid his obligation of P10,000 to C who had
since become insane. C lost P4,000 of the amount he
received and spent P6,000 for his food and other
necessary expenses. Was the obligation extinguished?
* The obligation is extinguished up to P6,000 only.
Payment of an obligation to an incapacitated person
shall be valid when the person has kept the thing
delivered and only insofar as the payment has been
beneficial to him. (1241)
 Art. 1242. Payment made in good faith to any person in
possession of the credit shall release the debtor.
Another case of payment where debtor need not prove that
creditor was benefitted from payment to third person.
PAYMENT MADE IN GOOD FAITH TO A PERSON IN POSSESSION OF
CREDIT SHALL RELEASE DEBTOR; REQUISITES:
• Payment by debtor must be made in good faith
• Creditor must be in possession of the credit and not merely the
evidence of indebtedness.
Note: Payment must be made to the person in possession of the
credit and not just to the person in possession of the evidence of
the credit. Reason: The person might merely hold the evidence of
the credit and not authorized to receive payment.
Art. 1243. Payment made to the creditor by the debtor after the
latter has been judicially ordered to retain the debt shall not be
valid.
Payment made by the debtor after he has been ordered by the
court not to make payment is not valid. The proceeding in which
the court orders the debtor not to make payment to his creditor,
but to the creditor is known as GARNISHMENT.

Example: D leased a building belonging to C. T filed a court action

against C for unpaid construction materials. While the case is
pending, upon motion of T, the court ordered D not to pay the rent
to C. If D paid the rent to C, the payment is momentarily valid.
BUT If the court later on renders judgment that T has proper claim
against C, D can be required by the court to pay again.
Art. 1244. The debtor of a thing cannot compel the creditor to
receive a different one, although the latter may be of the same
value as, or more valuable than that which is due.
In obligations to do or not to do, an act or forbearance cannot be
substituted by another act or forbearance against the obligee's
will.
a. In obligation to give, the debtor cannot compel the creditor to
accept a different one, although the latter may be of same
value as, or more valuable than that which is due.
Example: D obliged to give C a Toyota Hi Lux Pick up, Here D must
give the same prestation agreed upon. D cannot compel C to
accept a BMW car even if the latter is more valuable or expensive.
b. In obligations to do or not to do, an act or forbearance cannot
be substituted by another act or forbearance against the creditor’s
will.
Examples:
D agreed to paint the car of C. D cannot compel C that he will
instead paint C’s refrigerator.

D is a tenant of C’s building. D wanted to install an electric signage

in front of the building because it is more attractive advertisement
for his business especially at nighttime. However the lease
contract provides that D shall not install “any neon lights or any
other electrically-operated signage” on any part of the building. D
cannot substitute his forbearance with “not to install a tarpaulin
streamer” against the will of C.
When the provision does not apply
The provisions of Art. 1244 do not apply in the
following instances since the creditor is considered
to have agreed that another prestation may be
performed by the debtor
a. In facultative obligations (Art. 1206)
b. When there is dation in payment (Art. 1245)
c. When there is novation (Art. 1291)
d. In case the creditor has waived his right, whether
expressly or impliedly
Art. 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.
What are the different special forms of payment?
a) Dation in Payment or dacion en pago (Art. 1245)
b) Application of Payment ( Arts. 1252-1254)
c) Payment by Cession (Art.1255)
d) Tender of Payment and Consignation Arts.
(1256-1261)
Called “special” because they are not the ordinary means of causing
payment or performance.
Not strictly considered as special form of payment is APPLICATION FOR
PAYMENT
Reason: Application of payment is more of a designation of where
payment shall be applied, being insufficient to extinguish the entire
obligation.
Dation in Payment of Dacion en pago, adjudicacion
en pago or datio in solutum is a special form of
payment where the debtor conveys to the creditor
ownership a thing belonging to him as accepted
equivalent to payment or performance of the
obligation.
Example
Ayaw owes Lagi Php 50,000. Ayaw proposed to
Lagi that instead of paying P 50,000, the former
will convey and cede Ayaw’s ring worth Php
65,000. Lagi accepted the ring as payment of
Ayaw’s obligation.
Condition for a
Valid Dacion
•If creditor consents, for a sale presupposes
the consent of both parties

Note: Dacion en pago is governed by the Law

on Sales.
 SALE DATION IN PAYMENT

1. There is no pre-existing credit. 1. There is a pre-existing credit.

1. Give rise to an obligation. 1. Extinguishes obligations.

1. The cause or consideration here is the price, 3. The cause or consideration here, from the
from the viewpoint of the seller; or of the viewpoint of the person offering the dation, is
obtaining of the object from the viewpoint of the extinguishing of his debt; from the
the buyer. viewpoint of the creditor is the acquisition of
the object offered in lieu of the original credit.

3. There is less freedom in the determination of

1. There is greater freedom in the determination the price
of the price.
3. The giving of the object in lieu of the credit may
1. The giving of the price may generally end the extinguish completely or partially the credit
obligation of the buyer. depending on the agreement.
Art. 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.
Cession / Assignment
CESSION/ASSIGNMENT IN FAVOR OF CREDITORS – the
process by which debtor transfer all the properties not
subject to execution in favor of creditors is that the
latter may sell them and thus, apply the proceeds to
their credits
• extinguish up to amount of net proceeds (unless with
a contrary stipulation)
 Assignment
Kinds of Assignment:
• Legal – governed by the insolvency law (previously under Act
1956 now under FRIA)
• Voluntary – agreement of creditors
Requisites of Voluntary Assignment:
• More than one debt
• More than one creditor
• Complete or partial insolvency of debtor
• Abandonment of all debtor’s property not exempt from
execution
• Acceptance or consent on the part of the creditors
Effects of Assignment
• Creditors do not become the owner; they are merely
assignees with authority to sell
• Debtor is released up to the amount of the net
proceeds of the sale, unless there is a stipulation to
the contrary
• Creditors will collect credits in the order of preference
agreed upon, or in default of agreement, in the order
ordinarily established by law
 Dation in Payment Cession in Payment
One creditor Plurality of creditors
Not necessarily in state of financial Debtor must be partially or
difficulty relatively insolvent
Thing delivered is considered as Universality of property of debtor
equivalent of performance. is what is ceded. No ownership is
transferred to creditor, only
authority to sell
Payment extinguishes obligation to Merely releases debtor for net
the extent of the value of the thing proceeds of things ceded of,
delivered as agreed upon, proved assigned, unless there is a contrary
or implied from the conduct of the intention
creditor
Article 1246. When the obligation consists in the delivery of an
indeterminate or generic thing, whose quality and circumstances
have not been stated, the creditor cannot demand a thing of
superior quality. Neither can the debtor deliver a thing of inferior
quality. The purpose of the obligation and other circumstances shall
be taken into consideration.

Rule on Medium Quality

Applicable when obligation refers to obligation to give generic
things.
Based on equity – it supplies justice in cases where there is lack of
precise declaration in the obligation.
Be it noted that this provision may be waived by the creditor by
accepting inferior quality and by the debtor by delivering a thing of
superior quality.
Article 1247. Unless it is otherwise stipulated, the extrajudicial expenses
required by the payment shall be for the account of the debtor. With
regard to judicial costs, the Rules of Court shall govern.
Extrajudicial expenses shall be at debtor’s expense.
Reason: at the end it is the debtor that is benefited by the extinguishment
of the obligation. Exception: If there is contrary stipulation.
Transportation expenses incurred by the creditor in going to the domicile
of the debtor to collect is not among the expenses referred to in this
provision. (See Art. 1521) except if debtor is guilty of bad faith.
Losing party pays for the judicial cost, as a rule, unless the court equitably
distribute it to the litigating parties.
Law on Sales
Article 1487. The expenses for the execution and registration of the sale
shall be borne by the vendor, unless there is a stipulation to the contrary
Article 1248. Unless there is an express stipulation to that effect, the
creditor cannot be compelled partially to receive the prestations in
which the obligation consists. Neither may the debtor be required to
make partial payments.
However, when the debt is in part liquidated and in part unliquidated,
the creditor may demand and the debtor may effect the payment of the
former without waiting for the liquidation of the latter.

Reiteration of the Rule on Completeness of Payment (Art. 1233)

Exceptions of the Rule
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.
Payment of debts in money shall be made only in the Philippine
currency which the legal tender pursuant to Art. 1249 of the Civil Code
in relation to Republic Act No. 8183.

Obligation shall now be payable in the legal tender in the Philippines.

Legal tender means the currency which the debtor may compel his
creditor to accept payment of his debt.

However, the parties may stipulate that the payment may be made in
currency under than the legal tender of Philippines at the time of
payment. ( R.A. No. 8183)
But pursuant to Section 52 of Republic Act No.. 7653 (The New Central Bank Act),
"Legal Tender Power –
All notes and coins issued by the Bank shall be fully guaranteed by the
Government of the Republic of the Philippines and shall be legal tender in the
Philippines for all debts, both public and private. " This might mean, all notes and
coins being served or issued by the Central Bank of the Philippines When Offered
in payment extinguishes the debt is legal tender.
One Peso coin is no longer valid tender of payment to any amount.
According to BSP Circular No.. 537 issued by the Central Bank of the Philippines
on July 18, 2006, pursuant to Section 52 of RA 7653 (New Central Bank Act) and
the Monetary Board Resolution No.. 862 dated 6 July 2006, "the maximum
amount of coins to be considered as legal tender is adjusted as Follows:
1. One thousand pesos (P1, 000.00) for denominations of 1, Piso, Piso 5, and 10
pesos coins; and
2. One hundred pesos (P100.00) for denominations of 1-cent, 5-cent, 10-cent, 25-
cent coins.
Mercantile instruments (negotiable instruments) like checks, promissory
notes or bill of exchange even if payable to bearer are not considered legal
tender if legally they serve as substitute for money. Hence, if obligation is
paid by check even if it is a manager or cashier’s check where there is an
assurance that the check when presented for payment shall be encashed,
SHALL NOT BE CONSIDERED PAYMENT unless if the check has be converted
to cash. Hence payment takes place only when the check is converted to
cash. Acceptance of check as payment of obligation is just conditional
payment and shall effect as payment when the check is converted to cash.

Payment by check is deemed also as payment if through the fault of the

creditor, the check is impaired. Example: if through the fault of the creditor,
the debtor paid the person in possession of the credit in good faith. (Art.
1242)
Article 1250. In case an extraordinary inflation or deflation of the
currency stipulated should supervene, the value of the currency at the
time of the establishment of the obligation shall be the basis of payment,
unless there is an agreement to the contrary.
Concept of inflation and deflation – if ordinary, the value of the currency
shall be the value of the currency at the time of payment
BUT…..
In case of extraordinary inflation and deflation of the Philippine currency
should supervene the basis of the value of the currency for payment
shall be the value of the currency at the time of the establishment of the
obligation. Unless there is a stipulation to the contrary (Art. 1250)
Value of the currency at the time of the establishment of the obligation is
computed by using the following formula.

Amount to be paid: Amount of the obligation

Value of the obligation at X Amount of obligation
time of payment
Example:
D borrowed P 1 Million from c payable at the end of 10
years. Suppose that before maturity of the loan, an
extraordinary inflation supervened causing the value of
the debt to fall to P 500,000 on the date of maturity.
Following the above formula:
A = ( 1 million/500,000.00) x P 1Million
=2xP1M
= P 2 Million is the equivalent value of P 1 M in
the date of maturity
Suppose that before maturity of the loan, an extra-
ordinary deflation supervened causing the value of the
debt to rise to P 4 Million on the date of the maturity
of the loan, how much must D pay C on maturity?
A = ( 1M/4 M) x 1 M
= P 250,000 equivalent value of P 1 M on the date of
maturity
Article 1251. Payment shall be made in the place designated in the
obligation.
There being no express stipulation and if the undertaking is to deliver
a determinate thing, the payment shall be made wherever the thing
might be at the moment the obligation was constituted.
In any other case the place of payment shall be the domicile of the
debtor.
If the debtor changes his domicile in bad faith or after he has
incurred in delay, the additional expenses shall be borne by him.
These provisions are without prejudice to venue under the Rules of
Court.
Rules on Place of Payment
1. Stipulation Prevails (Autonomy of Will)
2. Absence of agreement or stipulation
a) If object is specific or determinate - the payment shall be made
wherever the thing might be at the moment the obligation was
constituted. (Location/place of the thing at the time of perfection of
contract or constitution of the obligation)
b) If not specific or determinate - place of payment shall be the domicile of
the debtor.
Note: Transportation and other additional expenses for collection or in going
to the place of payment shall be in the account of the creditor.
Exceptions – codal
a. If the debtor changes his domicile in bad faith ;
b. he has incurred in delay
Rules on Place of Payment
Concept of domicile
Domicile is the place of a person’s habitual residence. It is the place
where he has his true fixed permanent home and to which place where
he has his true fixed permanent home and to which place he,
whenever he is absent, has the intention of returning. This is LEGAL
DOMICILE

Domicile referred to by the law is ACTUAL DOMICILE – meaning the

place he can be actually found – BODILY PRESENCE ( also referred to
residence which is a component of domicile)
Law on Sales
Article 1521. xxxxxxxxxxxxxxx
Apart from any such contract, express or implied, or usage of
trade to the contrary, the place of delivery is the seller's place of
business if he has one, and if not his residence; but in case of a
contract of sale of specific goods, which to the knowledge of the
parties when the contract or the sale was made were in some
other place, then that place is the place of delivery.
• Where by a contract of sale the seller is bound to send the
goods to the buyer, but no time for sending them is fixed, the
seller is bound to send them within a reasonable time.
xxxxxxx
xxxxxxxxxx
xxxxxxxxxx
TIME & PLACE OF DELIVERY (CONTRACT OF
SALE)
1. follow stipulation in contact, or
2. follow usage of trade, or
3. seller’s place of business or his residence
4. specific goods – place where the thing was
at the time of perfection
5. Delivery is made at reasonable hour
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.
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.
Article 1254. When the payment cannot be applied in
accordance with the preceding rules, or if application
can not 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.
What is Application of Payment?
Application of payment may be defined as the
designation of debt to which payment must be applied
when the debtor has several obligations of the same
kind in favor of the same creditor.
Requisites:
a) There must be only one debtor and only one
creditor;
b) There must be two or more debts of the same kind;
c) All debts must be due;
d) The amount paid by the debtor must not be
sufficient to cover the total amount of all the debts.
The right to make an application of payment belongs to
the debtor.
However if he does not avail himself of this right, the
creditor may wrest the initiative from him by giving to
him a receipt designating the debt to which the
payment shall applied. But even this does not really
constitute an exception because the debtor may either
accept or reject the application. (See Art. 1252)
• Strictly speaking, it is not a form of payment but more
of a mode of payment.
The rule gives the presumption that the interest is paid
ahead of the principal obligation. Exception is if there is
a contrary stipulation. (Article 1253)
 What is meant by legal application of payment?
Legal application of payment refers to the following the
rules, both of which are enunciated in Art. 1254 of the
Civil Code;
a) When neither the debtor nor the creditor makes any
application of payment or if it cannot be inferred
from other circumstances, the debt which is most
onerous to the debtor among those which are due
shall be deemed to have been satisfied. The
following may be applied:
Examples.
• Where there are various debts, which are due and they were
incurred at different dates the oldest are more onerous.
• Where there are various debts, which are due and they were
incurred at different dates the oldest are more onerous.
• Where one bears interest and the other does not, the former
is more onerous
• Where one s secured the other is not, the former is more
onerous
• Where the debtor is bound as principal in one and as
guarantor or surety in another, the former is more onerous
• Where the debtor is bound as solidary debtor in one and as a
sole debtor in another, the former is more onerous.
b) If the debts due are of the same nature and burden, the payment shall
be applied to all of them proportionately.
Illustrations:
1. D owes C the following debts: P4,000 due on May 1; P4,000 due on
May 8; P4,000 due on May 15; P4,000 due on May 22; P4,000 due on May
29; and P4,000 due on June 5. The debts represented the price of
magazines which were delivered to D on a weekly basis. Of the six debts,
the one due on May 22 is secured by a pledge of D’s ring. By agreement of
the parties, C may demand payment even before the due date of the
debt. As of May 31, D had not paid any of the six debts. On May 31, D
wanted to make payment but he had only P4,000. How is the payment to
be applied?
* Since no agreement as to which debts should be settled first and
absent the fact that the creditor has not issued any receipt applying the
amount to any of the debts to which the debtor has not protested and
there was no cause of invalidating the same, and the period is for the
benefit of the creditor then the P4,000 should be applied to the one due
on May 22 since it is most burdensome.
Refer to no. 1, Assuming that D did not designate the debt to be paid
when he remitted the amount of P4,000 to C on May 31. C issued a
receipt for the payment he received from D but he did not also
designate the debt that was being paid. How would the payment be
applied?
* The payment shall be applied to the debt due on May 22 since it
is the most onerous.
D owes C the following debts: P200,000 due on June 1, 2008 secured by a
car; P200,000 due on May 1, 2015 with 10% interest; P300,000 due on May
1,2015 with 8% interest; P300,000 due on May 1,2008 secured by house
and lot; P200,000 due on April 1,2015 and P300,000 due on March 1, 2015.
By agreement of the parties, C may demand payment even before the due
date of the debt. Today is May 1, 2015 D had not paid any of the six debts.
D wanted to make payment but he had only P1,000,000. How is the
payment to be applied?
* the period is for the benefit of the creditor, the P1,000,000 should
be applied as follows:

Since no agreement as to which debts should be settled first and

absent the fact that the creditor has not issued any receipt applying the
amount to any of the debts to which the debtor has not protested and
there was no cause of invalidating the same, furthermore to illustrate in
figures:
Amount available P 1,000,000

Debt secured by house and lot

300,000

Balance
800,000

Debt with 10% Interest

• Interest 10% x P 200,000= P20,000

• Principal 200,000 220,000
Balance 580,000
Balance 580,000

Debt with 8% interest

Interest 8% x P 300,000= 24,000

Principal 300,000 324,000
Balance 256,000
****
The remaining P 256,000 shall be distributed proportionately to the debts
that are due and demandable as follows:

Remaining Debts: Ratio % Share (P256,000)

(a)Mar 1 P 300,000 3/5 (300/500) 60% P 153,600
(b)Apr 1 P 200,000 2/5 (200/500) 40% 102,400
500,000
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.

Meaning of Tender of payment – consists in the manifestation made by the
debtor to the creditor of his decision to comply immediately with the
obligation.

Meaning of Consignation: refers to the deposit of the object of the

obligation in a competent court in accordance with the rules prescribed by
law after refusal or inability of the creditor to accept tender of payment.

As a rule, there must be tender of payment first before consignation can be

effected.
Even without Tender of Payment, Consignation may be
validly pursued in the following:
a) When the creditor is absent or unknown or does not
appear at the place of payment;
b) When he is incapacitated to receive the payment at
the time it is due;
c) When without just cause he refuses to give a receipt;
d) When two or more persons claim the right to collect
and;
e) When the title of the obligation has been lost.
(Art.1256)
Meat Packing Corp. v Sandiganbayan, 359 SCRA 409 (2001)
Distinction Between Consignation and Tender of Payment.—Consignation is the
act of depositing the thing due with the court or judicial authorities whenever
the creditor cannot accept or refuses to accept payment, and it generally
requires a prior tender of payment. It should be distinguished from tender of
payment.
Tender is the antecedent of consignation, that is, an act preparatory to the
consignation, which is the principal, and from which are derived the immediate
consequences which the debtor desires or seeks to obtain.
Tender of payment may be extrajudicial, while consignation is necessarily
judicial, and the priority of the first is the attempt to make a private settlement
before proceeding to the solemnities of consignation.
Tender and consignation, where validly made, produces the effect of payment
and extinguishes the obligation.
 Requisites for Consignation:
FIRST REQUISITE: That there is a valid debt that is due:
Debt must be valid. Meaning it has not prescribed or premised
on illegal cause or consideration.
If obligation is conditional, condition has been fulfilled and
therefore it is now demandable.

SECOND REQUISITE:

That the consignation has been made either because the creditor
to whom tender of payment was made refused to accept the
payment without just cause or because any of the stated by law
for effective consignation without previous tender of payment
exists. (Art.1256)
Third Requisite – Valid Prior Tender of Payment unless Tender is excused:
Bonrostro v Juan, G.R. No. 172346, JUL 24 2013
Tender of payment “is the manifestation by the debtor of a desire to comply with or
pay an obligation. If refused without just cause, the tender of payment will discharge
the debtor of the obligation to pay but only after a valid consignation of the sum due
shall have been made with the proper court.”
“Consignation is the deposit of the [proper amount with a judicial authority] in
accordance with rules prescribed by law, after the tender of payment has been
refused or because of circumstances which render direct payment to the creditor
impossible or inadvisable.”
“Tender of payment, without more, produces no effect.” “To have the effect of
payment and the consequent extinguishment of the obligation to pay, the law
requires the companion acts of tender of payment and consignation.”

When a tender of payment is made in such a form that the creditor could have
immediately realized payment if he had accepted the tender, followed by a prompt
attempt of the debtor to deposit the means of payment in court by way of
consignation, the accrual of interest on the obligation will be suspended from the date
of such tender.
Del Carmen v Sabordo, GR 181723, Aug. 11, 2014
It is settled that compliance with the requisites of a valid consignation is
mandatory. Failure to comply strictly with any of the requisites will render
the consignation void. One of these requisites is a valid prior tender of
payment.

Under Article 1256, the only instances where prior tender of payment is
excused are: (1) when the creditor is absent or unknown, or does not appear
at the place of payment; (2) when the creditor is incapacitated to receive the
payment at the time it is due; (3) when, without just cause, the creditor
refuses to give a receipt; (4) when two or more persons claim the same right
to collect; and (5) when the title of the obligation has been lost. None of
these instances are present in the instant case. Hence, the fact that the
subject lots are in danger of being foreclosed does not excuse petitioner and
her co-heirs from tendering payment to respondents, as directed by the
court.
FOURTH REQUISITE :
That previous notice of the consignation has been given to the persons
interested in the fulfillment of the obligation. (Art.1257)
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.
- Meaning absent of the prior notice to persons interested in the fulfillment of
the obligation such as creditor, guarantors, mortgagees, solidary debtors and
solidary creditors) CONSIGNATION shall BE VOID.
Purpose of the notice - to give ample opportunity on the part of the creditor to
ponder on the refusal to accept payment considering if consignation is found
proper, under Article 1258, expenses of the consignation shall be charged in
creditor’s account. Moreover, risk of loss of the thing consigned shall be
borne by the creditor.
The consignation shall be ineffectual if it is not made strictly in
consonance with the provisions which regulate payment. ( Article
1257 2nd paragraph)
Creditor may have valid reason to refuse payment under the rules
on payment such as
a. Partial payment or performance
b. Irregular payment or performance
c. Payment made prematurely or not yet due
d. Payment using mercantile/negotiable instruments
e. Payment exclude interest and penalties due
f. Payment which is conditional
FIFTH REQUISITE– ACTUAL DEPOSIT OF THE THING/SUM DUE IN COURT
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.
It is understood that a complaint against the creditor to compel him to accept has
been instituted in court.
The deposit must pertain to the object that is due or the amount is complete and it
must be accompanied with proof of tender of payment is case it is necessary. It
must clearly alleged and proved why tender of payment is excused.
Legal effect of deposit:
1. Object is in custodia legis
2. 2. Exempted from attachment or execution
3. If perishable, court may order it sold and shall keep proceeds of the sale
SIXTH REQUISITE
That after the consignation has been made, the person interested in the
fulfillment of the obligation had been notified thereof.
(Art. 1258 par. 2)

Purpose of the second notice is obviously for reason to inform the creditor of
the fact of consignation so he can withdraw it in court or for him to dispute
the legality of the consignation.
This requirement is mandatory and therefore without such subsequent
notice, consignation is void unless the amount due is a consequent of a final
judgment inasmuch as the law refers only to contractual debt and not one
decreed by court.

It is advisable to issue formal notice. It was held however that the complaint
attached to the summons can take place of said subsequent notice.
SEVENTH REQUISITE
That the thing or amount due had been placed at the disposal or judicial
authority (Art.1258 par. 1)
After notice, the actual deposit of the thing due in court shall be made.
Be it noted that the purpose of consignation is not only for safekeeping of the
thing. But for the court to determine if the tender of payment was made or if
tender of payment is not required in accordance with Article 1256)
Article 1260 ( 1st paragraph) - Once the consignation has been duly
made, the debtor may ask the judge to order the cancellation of the
obligation.

EIGHT REQUISITE
Judicial declaration that the consignation is proper with prayer on the
part of the debtor to be discharged from the obligation.
Meaning – the court shall determine the legality of the consignation. If
it found consignation proper, it shall charge the consignation expenses
in the account of the creditor. The creditor shall be given ample
opportunity to answer the allegations of the debtor.
Debtor shall not be immediately release from obligation upon
consignation. Debtor may move for the cancellation of his obligation
upon the declaration of the court that consignation is proper.
Should the court finds consignation is proper or duly made, legal effects are as follows:
a. The debtor may ask the judge to order the cancellation of the obligation.
b. The running of interest is suspended.
c. But before the creditor accepts or before the judge declares that consignation has
properly made, thee obligation remains.

No judicial approval is needed if ALL the essential requisites for a valid consignation are
present. This is particularly true when the deposit and the records of the case are
accidentally destroyed, but there is NO reason shown why consignation should be
considered improper.

Article 1259 – The expenses for consignation, when properly made, shall be charged
against the creditor.

Reason – this consignation is due to the fault of the creditor.

Moreover if consignation is proper as declared by court or if creditor signifies to accept or
all elements for valid consignation are present, creditor bears the loss.
Effects if consignation is improper:
1. Obligation remains and consignation is not effective as payment
2. If at the time of consignation the debt is already due, and the requisites for
consignation are absent, the debtor is in default.
Effect of withdrawal of the thing deposited by the debtor:

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 (Art. 1261 2nd paragraph)
The debtor can change his mind and withdraw the thing already
deposited in court as a MATTER OF RIGHT
a. Before the creditor has accepted the consignation; and
b. Before a judicial declaration that the consignation has been properly
made as he is still the owner of the thing deposited in such stage.
Consequence: Obligation continues to be in force and all expenses will
be paid in his account. No consent of creditor is required.
Article 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.
Since consignation is for the benefit of the creditor in this given stage, creditor
may authorize the debtor to withdraw the deposit after creditor accepted it
or after court issued an order cancelling the obligation.
Effects:
a. Obligation remains
b. Creditor loses any preference (priority) over the thing.
c. The co-debtors, guarantors and sureties are released unless they
consented.
*The co-debtors referred to are solidary co-debtors, not joint ones, for their
liabilities are distinct. For solidary co-debtors, they are released only from
solidarity but not from their own individual shares unlike guarantors and
sureties, the solidary co-debtors are in themselves principal debtors.
 Loss of the Thing Due

Article 1262. An obligation which consists in the delivery of a

determinate thing shall be extinguished if it should be lost or
destroyed without the fault of the debtor, and before he has
incurred in delay.

When by law or stipulation, the obligor is liable even for

fortuitous events, the loss of the thing does not extinguish the
obligation, and he shall be responsible for damages. The same
rule applies when the nature of the obligation requires the
assumption of risk.
LOSS OF THE THING DUE (Arts. 1262-1269) – means that
the thing which constitutes the object of the obligation
perishes, or goes out of the commerce of man or
disappears in such a way that its existence is unknown or it
cannot be recovered. (Art. 1189. NO. 2)

In its broad sense, it means impossibility of compliance or

performance with the obligation through any cause.
LOSS OF THE THING DUE REFERRED IN THIS CHAPTER
1.Physical loss – when a thing perishes as when
the house is burned and reduced to ashes.
2.Legal loss – when the thing goes out of
commerce.
3. Civil loss –when the thing disappears in such
a way that its existence is unknown or even if
known, it cannot be recovered, whether as a
matter of fact or of law.
EXTINGUISHMENT OF OBLIGATION TO DO BY REASON OF
LOSS OF THE THING DUE:

REBUS SIC STANTIBUS - agreement is valid only if the same

conditions prevailing at time of contracting continue to
exist at the time of performance
General Rule: Debtor is released when prestation becomes
legally or physically impossible without fault on part of
debtor
4. Physical or legal impossibility
Art. 1266. The debtor in obligations to do shall also be
released when the prestation becomes legally or physically
impossible without the fault of the obligor.
 Difficulty of performance
Art. 1267. When the service has become so difficult as to be
manifestly beyond the contemplation of the parties, the obligor may
also be released therefrom, in whole or in part
EFFECT OF DIFFICULTY BEYOND PARTIES’ CONTEMPLATION
Rule: Obligor may be released in whole or in part
REQUISITES:
• The event or change could not have been foreseen at the time of
the execution of the contract
• The performance is extremely difficult, but not impossible (because
if it is impossible, it is extinguished by impossibility)
• The event was not due to the act of any of the parties
• The contract is for a future prestation
Doctrine of Frustration of Commercial Object or Frustration of
enterprise.
In order that an obligation shall be extinguished
by the loss or destruction of the thing if is
essential that the following requisites must
concur:
a) The thing, which is lost, is specific or
determinate
b) The thing is loss without any fault of the
debtor if that thing is lost through the fault of
the debtor the obligation is transformed into
an obligation to indemnify the obligee or
creditor for damages.
c) The debtor is not guilty of delay
Exceptions to the above rule are as follows:
a) When by law the obligor is liable for fortuitous events (Arts. 1174 and
1262 par 2)
b) When by stipulation the obligor is liable even for fortuitous events.
(Arts 1174 and 1262 par 2)
c) When the nature of the obligation requires the assumption of risk. (Arts.
1174 and 1262 par 2)
d) When the loss of the thing is due party to the fault of the debtor (Art
1262 par 1 CC)
e) When the loss of the thing occurs after the debtor has incurred in delay.
(Art 1262 par.1 and Art 1135 par. 3)
f) When debtor promised to deliver the same thing to two or more persons
who do not have the same interest (Art. 1165 par 3)
g) When the obligation is generic (Art.1263)
Article 1263. In an obligation to deliver a generic thing,
the loss or destruction of anything of the same kind
does not extinguish the obligation.

Generic things do not perish

Genus nunquam perit
h) When the debt of a certain and determinate thing
proceeds from a criminal offense (Art 1268)
Article 1268. When the debt of a thing certain and
determinate proceeds from a criminal offense, the
debtor shall not be exempted from the payment of its
price, whatever may be the cause for the loss, unless
the thing having been offered by him to the person
who should receive it, the latter refused without
justification to accept it.
Article 1264. The courts shall determine whether, under
the circumstances, the partial loss of the object of the
obligation is so important as to extinguish the
obligation. (

EFFECT OF PARTIAL LOSS – ( judicial determination of

extent is necessary)
when loss is significant – may be enough to extinguish
obligation
when loss insignificant – not enough to extinguish
obligation
Article 1269. The obligation having been extinguished by the loss of the
thing, the creditor shall have all the rights of action which the debtor may
have against third persons by reason of the loss.
Transfer of Rights to the Creditor In Case of Loss By Operation of Law
Example:
S is obliged to deliver this car to B. But X destroys the car. B has the right
to sue X. This right is given to instead of D because otherwise S would
unduly profit in that he will gain two things: first, his obligation to give
the car or its value is its extinguished; second, he would be allowed to
recover from X. It is obvious that S must not unduly profit at the expense
of B. After all, it was B who actually borne the loss.

Rights of Action include the insurance indemnity that may have been
received.
 CONDONATION OR REMISSION
Article 1270. Condonation or remission is essentially
gratuitous, and requires the acceptance by the obligor. It may
be made expressly or impliedly.

One and the other kind shall be subject to the rules which
govern inofficious donations. Express condonation shall,
furthermore, comply with the forms of donation.
CONDONATION AND REMISSION
(Arts. 1270 – 1274) – Is an act of
liberality by virtue of which the
obligee, without receiving any
price or equivalent, renounces
the enforcement of the obligation
as a result of which it is
extinguished in its entirely or in
that part or aspect of the same to
which the remission refers.
It is gratuitous abandonment by
the creditor of his right.
Requisites:
1. There must be an existing obligation
2. The act of abandonment or renunciation of the obligation
or the cause or consideration thereof must be
ESSENTIALLY GRATUITOUS ( pure act of liberality of the
creditor)
3. There must be a subject matter of the remission
3. It must be accepted by the obligor
4. The parties must have capacity and must consent to the agreement
to cause remission
5. It must not be Inofficious otherwise it would be reducible so
that it would not impair legitimes of compulsory heirs; and
6) If made expressly, it must comply with the forms of
donations. Otherwise, remission or condonation is not
valid.
Meaning of Legitime –
Article 886 of the Civil Code defines a legitime as
“that part of the testator’s property which he cannot
dispose of because the law has reserved it for certain
heirs who are, therefore, called compulsory heirs.”
The legitime is basically inheritance which a
compulsory heir receives.

Meaning of Inofficious Donation –

If Donation or Condonation caused by the testator or
person when he was alive impairs the legitime of the
compulsory heirs, it is INOFFICIOUS.
Hence the law allows the reduction or invalidation of
said donation or remission at the instance of the
compulsory heirs. The aggrieved heirs must come to
court and initiate proceeding for invalidation or
reduction of donation or remission.
RULES RE INOFFICIOUS DONATIONS
1. Value of the estate at the time of donor’s
death

2. Inofficious donations may not only be reduced

but they may be completely cancelled

3. Since the inofficiousness of the donation

cannot be determined till after the donor’s
death, it follows that in the meantime, the
donation is valid and ownership is transmitted
to the donee during the donor’s lifetime
PERSONS WHO CAN ASK FOR THE REDUCTION OF
INOFFICIOUS DONATIONS
1. The compulsory heirs of the donor
2. Heirs and successors-in-interest of the compulsory
heirs

PRESCRIPTIVE PERIOD
Action must be brought within 5 years from the time
of donor’s death

PREFERENCE GIVEN TO EARLIER DONATIONS

It is essential that in cases there is need to reduce, the
subsequent ones must first be reduced

If the donations be constituted at the same time, then

there will be proportionate reductions on both
Classes of Remission
As to effect or extent
a. Total – entire obligation is extinguished
b. Partial – when only a part of the obligation or only the
accessory obligation is extinguished
As regards its effectivity:
a. Inter vivos – one which takes effect during the lifetime of
the donor (creditor)
b. Mortis causa – One that takes effect upon death of the
donor or creditor and partakes the nature of a
testamentary disposition.
As to form:
a. Express or formal ( this requires the formalities of a donation)
FORMS:
1. Express Condonation involving real property must be in
public instrument together with the acceptance of donee.
2. Express Condonation of personal property amounting to
P 5,000 above must be in writing together with the
acceptance of donee
YAM v. CA, G.R. No. 104726, 11 February 1999
FACTS:
The parties herein entered into a Loan Agreement with Assumption of Solidary Liability. Petitioner
subsequently obtained a second Industrial Guarantee and Loan Fund. The petitioner had paid the first
debt, it so happened that the private respondent was placed under receivership. The petitioner made a
partial payment to the second loan and the private respondent sent an answer letter to the petitioner
that their penalty charges will decrease provided that they can pay on or before July 30, 1986. Because
of the failure of the petitioner to pay the specific amount totaled private respondent filed a complaint
against the petitioner. The petitioner now contending that they had fully paid their obligation where
before July 2, 1986, Yam and his wife the president of the respondent’s corporation agreed to waive the
penalties and services charge provided petitioners paid the principal and interest.
ISSUE: - Whether petitioners are liable for the payment of the penalties and service charges on their
loan which, as of July 31, 1986
RULING:
• In the case at bar, it is undisputed that the alleged agreement to condone P266,146.88 of the second
IGLF loan was not reduced in writing.
• Art. 1270, par. 2 of the Civil Code provides that express condonation must comply with the forms of
donation. Art. 748, par. 3 provides that the donation and acceptance of a movable, the value of
which exceeds P5,000.00, must be made in writing, otherwise the same shall be void.
• Moreover, it is to be noted that the alleged agreement to condone the amount in question was
supposedly entered into by the parties sometime in July 1986, that is, after respondent corporation
had been placed under receivership on November 4, 1985. As held in. Thus, Sobrepeas had no
authority to condone the debt.
Capacity of the person causing remission
May the corporation, through its president condone penalties and charges
after it had been placed under receivership?
No. The appointment of a receiver operates to suspend the authority of a
corporation and of its directors and officers over its property and effects, such
authority being reposed in the receiver (Yam v. CA, G.R. No. 104726 Feb 11,
1999).
FACTS:
Petitioners Victor Yam and Yek Sun obtained an IGLF loan from respondent Manphil Invest
Corporation in the amount of Php 300,000 with interest. It was secured by chattel mortgage.
On April 2, 1985, respondent was placed under receivership of Central Bank. Petitioners paid
on July 31, 1986 which was received by Central Bank. It contained a notation on the voucher
that there was already a full payment of IGLF loan. However, respondent filed a collection case
against petitioner after it failed to pay the remaining balance. Petitioner contended that
through respondent’s president, Carlos Sobrepeñas, it was agreed to condone or waive the
penalties and service charges as well as a voucher showing the full payment of the petitioners.
The trial court rendered a decision in favor of respondents which was sustained by CA.
ISSUE:
Whether or not there was condonation on petitioner’s loan
HELD:
NO. The appointment of a receiver operates to suspend the authority of a corporation and of
its directors and officers over its property and effects, such authority being reposed in the
receiver. Sobrepeñas has no authority to condone the debt. The notation on the voucher
covering the check payment that a “full payment of IGLF loan” was made does not bind
respondent. It would have been different if the notated appeared in the receipt issued by the
corporation through its receiver, which would be an admission against interest. Express
condonation must comply the forms of donation. Where the value exceeds Php 5,000, the
donation and acceptance must be made in writing; otherwise, void.
b. Implied or Tacit – one inferred from the conduct of the parties.
Provisions on Implied Remissions under this chapter
Article 1271. The delivery of a private document evidencing a credit,
made voluntarily by the creditor to the debtor, implies the renunciation
of the action which the former had against the latter.
If in order to nullify this waiver it should be claimed to be inofficious,
the debtor and his heirs may uphold it by proving that the delivery of
the document was made in virtue of payment of the debt.
Effect of Delivery of Private Document Evidencing Credit
Take note that the document must be PRIVATE. This provision will not
apply if document is public one.
Delivery of the private document or instrument a remission or
renunciation is presumed, when payment is not alleged or proved.
Reason : Payment is not presumed considering it must be proven. It
should be noted that as between the presumption of remission and the
presumption of payment, the first (remission) ordinarily prevails.
Example: Bella made a promissory note in favor of Ruben in the
amount of P 1,000. After sometime Ruben voluntarily delivered
the promissory note to Bella without collecting the P 1,000. Bella
is now in possession of said note. There is a disputable
presumption that there has been a remission.

If assuming Ruben dies and after inventory of all his properties, it

was found out that the legitimes of his heirs were impaired by
reason of said remission, 2nd paragraph of Article 1271 allows his
heirs to nullify ( invalidate or seek for reduction) on the ground of
being inofficious.

Bella or her heirs on the otherhand can also set up the defense of
payment by proving that the delivery of the note was by virtue of
payment.
Article 1272. Whenever the private document in which the
debt appears is found in the possession of the debtor, it shall
be presumed that the creditor delivered it voluntarily, unless
the contrary is proved.
Presumption of Voluntary Delivery if Evidence of Credit
is already in possession of the debtor assuming obligation is
not yet paid. Remember Payment is NOT PRESUMED. BUT
REMISSION IS PRESUMED IF PRIVATE DOCUMENT
EVIDENCING CREDIT IS IN THE POSSESSION OF THE DEBTOR.
Article 1273. The renunciation of the principal
debt shall extinguish the accessory obligations;
but the waiver of the latter shall leave the former
in force.

Renunciation of the Principal obligation

extinguishes the accessory but not VICE-VERSA.
This follows the rule that the accessory follows
the principal
Article 1274. It is presumed that the accessory obligation of pledge
has been remitted when the thing pledged, after its delivery to the
creditor, is found in the possession of the debtor, or of a third person
who owns the thing.
Pledge is real contract. Meaning delivery of the thing pledged to the
creditor is necessary for the perfection of the contract. See Article
1316 identification of some real contracts. The thing pledged
remains with the creditor until the entire obligation is settled.
Hence:
If the thing pledged is already in the possession of the debtor, there
is presumption of REMISSION OF THE PLEDGE ONLY. The principal
obligation (the loan) remains in force. The presumption is only
disputable.
Confusion or Merger of
Rights
Article 1275.
The obligation is
extinguished from the
time the characters of
creditor and debtor are
merged in the same
person
CONFUSION OR MERGER (Arts. 1275-1277) - Merger of the
characters of creditor and debtor in the same person by virtue of
which the obligation is extinguished.
Meeting in the same person of the qualities of the creditor and the
debtor with respect to one and the same obligation.

Reason or Basis for Merger

If a debtor is his own creditor, enforcement of the obligation
becomes absurd, since one cannot claim against himself.
 Requisites:
a) That the merger of the characters of the creditor and debtor
must be in the same person. (Art.1275)
b) That it must take place in the person of either the principal
creditor or principal debtor (Art.1276)
c) That it must be clear and definite.
Example:
A makes a check payable to bearer and hands the check to C, who
hands it to D and who finally hands it to C as payment in a
transaction. Here A owes himself, a clear case of merger, hence
the obligation is extinguished.
Article 1276. Merger which takes place in the person of the principal
debtor or creditor benefits the guarantors. Confusion which takes
place in the person of any of the latter does not extinguish the
obligation.
Effect of Merger on Gurarantors
Accessory follows the principal ( the guaranty being considered
accessory obligation), hence, if there is merger with respect to the
principal debt the guaranty is extinguished.
But confusion to the person of the guaranty will not cause
extinguishment by reason of Merger. The CONTRACT OF
GUARANTY SHALL BE EXTINGUISHED AND there is a clear case of
Novation, there being a change is the person of the creditor. Being
now the creditor, he cannot assume the role as the guarantor of
the debtor at the same time.
Examples:
A owes B P 1,000 guaranteed by C. B assigned his credit to X. X
assigns his credit to Y and Y assigns his credit to A. Since A’s
obligation is extinguished by merger, the obligation of C as
guarantor is likewise extinguished.

A owes B P 1,000 guaranteed by C. B assigned his credit to X. X

assigns his credit to Y and Y assigns his credit to C, the guarantor.
Does A still have to pay C?
The answer is Yes. C is now the new creditor by virtue of novation.
The contract of guaranty is extinguished but not the obligation of A
to pay Php 1,000 to C>
Article 1277. Confusion does not extinguish a joint obligation except as
regards the share corresponding to the creditor or debtor in whom the
two characters concur.
Merger in Joint Obligation – merger taking place in the person of one of
the joint debtors or joint creditors extinguishes only the share
corresponding to the debtor or creditor in whom the two characters
concur.
Example:
A, B and C, joint debtors issued a promissory note for Php 30,000
payable to X. X assigns the note to Y, Y to Z and Z to A. Here only A’s
share amounting to P 10,000 is extinguished because it is only in his
person where the qualities of debtor and creditor concur. B and C are
still liable for Php 20,000 to A who is now the new creditor.
Merger in a Solidary Obligation-merger in one of the solidary debtors or
solidary creditors extinguishes the entire obligation (Art. 1215). The
solidary debtor in whom the characters of debtor and creditor concur
can demand reimbursement from his co-debtors (Article 1217). In the
case of solidary creditors, he shall be liable to his co-creditors for the
share corresponding to each of them.
Example:
A, B and C, solidary debtors issued a promissory note for P 30,000
payable to X. X assigns the note to Y. Y to Z and Z to A. Here the entire
obligation is extinguished. A can go to B and C for reimbursement of P
10,000 each for their share in the obligation.
Art. 1278. Compensation shall take place when two persons, in their own
right, are creditors and debtors of each other. (1195)
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at
the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the
latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the
debtor.
COMPENSATION – Compensation may be defined as a
mode of extinguishing in their concurrent amount those
obligations persons who in their own right are creditors
and debtors of each other.

Requisites for legal compensation under Article 1279:

a) There must be two parties, who in their own right, are
principal creditors and principal
debtors of each other. (Arts. 1278, 1279. No. 1)
b) Both debts must consist in money, or if the things due
are fungibles (consumables), they must be of the same
kind and quality (Art. 1279. NO.2)
 c) Both debts must be due (Art. 1279. NO. 3)
d) Both debts must be liquidated and demandable
( Art 1279 NO. 4)
e) There must be no retention or controversy
commenced by third persons over either of the debts
and communicated in due time to the debtor
(Art.1279 NO. 5 CC)
f) The compensation must not be prohibited by law
(Arts 1278, 1288)
Art. 1290. When all the requisites mentioned in Article 1279 are
present, compensation takes effect by operation of law, and
extinguishes both debts to the concurrent amount, even though
the creditors and debtors are not aware of the compensation.
Under Article 1290 “When all the requisites mentioned in Article
1279 are present, compensation takes effect by operation of law, and
extinguishes both debts to the concurrent amount, even though the
creditors and debtors are not aware of the compensation.
Art. 1280. Notwithstanding the provisions of the preceding
article, the guarantor may set up compensation as regards
what the creditor may owe the principal debtor.

General Rule: Guarantor cannot set up compensation with creditor

because guarantor is not a principal debtor. Exception:

D owes C P20,000 with G as Guarantor. C, on the other hand, owes

D, P15,000. Both debts are already due but D is insolvent. Can
compensation take place?
* Yes. A guarantor can set up compensation as regards what
the creditor may owe the principal debtor. However, C may still
collect from G P5,000.
Instances when legal compensation is not allowed by
law: Meaning compensation can be set up only by
one of the contracting parties – FACULTATIVE
COMPENSATION
• When one of the debts arises from depositum or
from the obligation of a depositary or of a bailee in
commodatum. (Art. 1287)
• Where one of the debts arises from a claim for
support due by gratuitous title. (Art. 1287)
• Where on of the debts consists in civil liability from
a penal offense. (Art. 1288)
Different classification of Compensation:
a) Legal – when it takes place by operation of law
from the moment all of the requisites
prescribed by law are present (Arts 1278 & 1279)
b) Voluntary – when the parties who are mutuality
creditors and debtors agree to
compensate their respective obligations even if the
requisites of compensation may not be present.
c) Judicial – when it takes effect by judicial decree.
d) Facultative – when it can only be set up by one of
the parties.
Art. 1281. Compensation may be total or partial. When the two debts
are of the same amount, there is a total compensation.
a. total – when 2 debts are of the same amount
b. partial – when 2 debts are not of the same amount
Application of this provision:
To all kinds of compensation, be they be legal, conventional,
judicial or facultative.
Art. 1282. The parties may agree upon the
compensation of debts which are not yet due.
Meaning of conventional/ voluntary
compensation
conventional – agreement of parties is enough,
forget other requirement as long as both
consented
Art. 1283. If one of the parties to a suit over an obligation has a claim
for damages against the other, the former may set it off by proving
his right to said damages and the amount thereof.
Judicial compensation or set-off
This is compensation that is ordered by the court. The party who has
a claim for damages must plead them in his counterclaim and show
proof he is entitled.
Example: D is indebted to C for Php 50,000. C sued D for collection.
In the same suit, D filed a counterclaim for breach of contract
against C which C was able to prove in court as well. The court can
apply setting off against the claims of both opposing parties if found
they are entitled of their respective claims. Since the initiative was
imposed by court, compensation is judicial.
Art. 1284. When one or both debts are rescissible or voidable,
they may be compensated against each other before they are
judicially rescinded or avoided.
Compensation takes place although the one or both debts are
rescissible or voidable since they are valid until rescinded or
avoided by decree of law.
Example:
D is indebted to C for P 30,000. Later D by means od violence
forced C to buy his dilapidated car and sign a promissory note for
P 30,000. D’s debt is valid while C’s death is voidable because of
vitiated consent. If all the requisites of legal compensation are
present, then both debts are extinguished. However if the
contract is annulled by court, the compensation shall be cancelled
or invalidated as well by the court.
Art. 1285. The debtor who has consented to the assignment of
rights made by a creditor in favor of a third person, cannot set up
against the assignee the compensation which would pertain to
him against the assignor, unless the assignor was notified by the
debtor at the time he gave his consent, that he reserved his right
to the compensation.

If the creditor communicated the cession to him but the debtor

did not consent thereto, the latter may set up the compensation of
debts previous to the cession, but not of subsequent ones.

If the assignment is made without the knowledge of the debtor, he

may set up the compensation of all credits prior to the same and
also later ones until he had knowledge of the assignment.
Assignment, concept: It is a contract whereby a person
(assignor) transfers his credit, right or action against third
person to another person known as assignee for a
consideration certain in money or its equivalent.
Example:
D owes C P 10,000. The debt is evidenced by a
promissory note executed by D and payable to C. C
assigns the note T with notice to D. The contract between
C and T is known as assignment with C as assignor, and T,
the assignee. D will have to make the payment to T and no
longer to C.
Effect of assignment of credit to 3rd person;
can there still be compensation
a. if made after compensation took place – no
effect; compensation already perfected
b. if made before compensation took place –
depends
1.with consent of debtor – debtor is estopped
unless he reserves his right & gave notice to
assignee
2.with knowledge but w/o consent of debtor –
compensation may be set up as to debts
maturing prior to assignment
3.w/o knowledge – compensation may be set-up
on all debts prior to his knowledge
Illustrations:

1. D owes C P20,000 due on June 20. C owes D P14,000

due on June 15. On June 12, C assigned his right to X. D
consented to such assignment without any reservation of
his right to the compensation. On June 20, how much may
X collect from D?
* P20,000. No compensation shall take place since
there was no reservation of such right by D upon the
assignment of the credit. (1285 par 1)
2. D owes C P30,000 due on June 20. C owes D the
following debts: P15,000 due on June 2; P4,000 due on
June 14; P6,000 due on June 16; and P3,000 due on June
18. On June 17, C assigned his right to X. C notified D of the
assignment but D did not give his consent thereto. How
much may X collect from D on June 20?
* P5,000. Since the assignment, although with knowledge,
is without consent of D therefore compensation shall take
place but only to the debts prior to the assignment. (1285
par 2)
3. Refer to no. 2. Assume the same facts except that when
C made the assignment of his credit to X, C did not notify D
about it. It was only on June 20 when X went to D to collect
that D learned of the assignment. How much may X collect
from D?
* P2,000. The assignment is without knowledge of D,
therefore the latter may set up compensation of all credits
prior to the same and also later ones until he had
knowledge of the assignment. (1285 par 3)
Art. 1286. Compensation takes place by operation
of law, even though the debts may be payable at
different places, but there shall be an indemnity
for expenses of exchange or transportation to the
place of payment.
Legal compensation to take place although debts
are payable at different places. But there shall be
indemnity for expenses of exchange or
transportation.
Example:
D is a rice dealer based in Davao City , owes C, a rice
dealer based in Cebu City, 100 sacks of rice which C
delivered from own stock to X, customer of D who is a
resident of Cebu City. C also owes D 100 sacks of rice
which D delivered from his own stock to Y, C’s customer
who is a resident of Davao City. Both debts are now due.
In this case, compensation can take place although debts
are payable in different places. However if D incurred P
1,500 in transporting the rice to Davao City and C
incurred P 1,500 in transporting the rice in Cebu City,
then C must pay D the difference of P 500.00.
Art. 1287. Compensation shall not be proper when one
of the debts arises from a depositum or from the
obligations of a depositary or of a bailee in
commodatum.

Neither can compensation be set up against a creditor

who has a claim for support due by gratuitous title,
without prejudice to the provisions of paragraph 2 of
Article 301. (1200a)

Art. 1288. Neither shall there be compensation if one of

the debts consists in civil liability arising from a penal
offense.
When legal compensation is prohibited?
The provision applies to cases whereby only one
party has the right to claim or oppose the compensation.
This is known as FACULTATIVE COMPENSATION
Example:
D owes C P 5,000 payable on or before December 31. C
owes D P 5,000 payable on December 1. Since the period
is for the benefit of D, he may pay before December 31.
So he can claim compensation on December 1. If C claim
compensation on December 1, D may oppose it since he
cannot be compelled to pay before December 31.
Deposit – is a deposit whereby a person receives a thig belonging to
another for purpose of safekeeping it and returning the same. (Art.
1962)
In contract of deposit, the depositary cannot set up
compensation against the depositor if he fails to return the object of
deposit as against any amount which the depositor owes the
depositary.
Nature of deposit- fiduciary – involves trust and confidence. To avoid
abuse, compensation is prohibited.
Purpose is safekeeping only
A owes B P10,000 by virtue of a loan contract. B owes A P 10,000
because the former damaged A’s car while it was deposited to B.
A can set up because his obligation arose from loan but B cannot
because his obligation arose from a contract of deposit.
 In contract of commodatum, the bailee
cannot set up compensation but the bailor can.
Reason: This is because it would violate the
fiduciary character of the contract of deposit or
commodatum. But the depositor or bailor can set
up by way of compensation against the
depositary’s or bailee’s credit. Here, only one
party can set up compensation. (Art. 1287)
 Person obliged to give support cannot also set up
compensation unless support has developed into arrears. In
such case, compensation is possible.(Art. 1287)
Neither shall there be compensation if one of the debts
consists in civil liability arising of a crime. The one whose
obligation arose from said liability cannot set up compensation
against the other but the latter can. (Art. 1288)
Article 1291. Obligations may be modified by:

(1) Changing their object or principal conditions;

(2) Substituting the person of the debtor;

(3) Subrogating a third person in the rights of the creditor.

 NOVATION (Arts. 1291 – 1304)

Novation is the substitution or change of an obligation by another, resulting in

its extinguishment or modification, either by changing its object or principal
conditions or by substituting another in place of the debtor, or by
subrogating a third person in the rights of the creditor

Classification of Novation:
a) Objective or real – refers to the change either in the cause object or
principal conditions of the obligation
b) Subjective or personal – refers to the substitution of another person of
the debtor (passive) or subrogating a third person of the rights of the
creditor (active). (Arts. 1291, Nos. 2 and 3)
c) Mixed – refers to the combination of objective and subjective novation.
Requisites of Novation:
a) A previous valid obligation;
b) Agreement of the parties to the
new obligation;
c) Extinguishment of the old
obligation and
d) Validity of a new obligation
Article 1292. In order that an obligation may be extinguished by another which
substitute the same, it is imperative that it be so declared in unequivocal
terms, or that the old and the new obligations be on every point
incompatible with each other.
NOVATION is not presumed. If must be clearly and unmistakably established
either by the express agreement of the parties or acts of equivalent import.
Test of incompatibility – in order an obligation may be impliedly extinguished by
another, which substitutes the same, it is imperative that the old and new
obligation must be incompatible with each other on every point. It is then
imperative to determine whether or not both can stand together, each having
its own independent existence. If they can stand together, there is no
incompatibility consequently there could be no novation.
•
Kinds of Novation:

According to origin:
• Legal – that which takes place by
operation of law.
• Conventional – that which takes place
by agreement of the parties.
According as to how it is constituted:
• Express- when it is so declared in unequivocal terms.
• Implied - when the old and the new obligations are
essentially incompatible with each other.
According to extent or effect:
Total or extinctive - when the old obligation is
completely extinguished.
• Partial or modificatory-when the old obligation is
merely modified.
• According to the subject:
Real or objective- when the object (or cause) or the
principal conditions of the obligation are changed.
Personal or subjective- when the person of the debtor is
substituted and/or when a third person is subrogated in
the rights of the creditor.
Mixed –when the object and/or principal conditions of
the obligation and the debtor or the creditor, or both
the parties, are changed. It is a combination of real and
personal novations.
Article 1293. Novation which consists in substituting a new debtor in the place
of the original one, may be made even without the knowledge or against the
will of the latter, but not without the consent of the creditor. Payment by the
new debtor gives him the rights mentioned in articles 1236 and 1237. (1205a)
Article 1294. If the substitution is without the knowledge or against the will of
the debtor, the new debtor's insolvency or non-fulfillment of the obligations
shall not give rise to any liability on the part of the original debtor.

Personal or subjective- when the person of the debtor is substituted and/or

when a third person is subrogated in the rights of the creditor.
Kinds of substitution:
Expromission – or that which takes place when a third person
of his own initiative and without the knowledge or against
the will of the original debtor assumes the latter’s obligation
with the consent of the creditor.
• Effect – the new debtor’s insolvency or non-
fulfillment of the obligation will not revive the action of
the creditor against the old debtor whose obligation is
extinguished by the assumption of the debt by the new
debtor. If the new debtor pays the creditor, he is not
subrogated with the rights of the creditor; he is only
entitled to be beneficial reimbursement.
 Delegation – one which takes place when the creditor
accepts a third person to
• take place of the debtor at the instance of the latter.
The creditor may withhold approval. (art. 1295) In
delegacion, all the parties the old debtor, the new
debtor and the creditor must agree. If the payment
was made with the consent of the original debtor or
on his own initiative (delegacion), the new debtor is
entitled to reimbursement and subrogation under
Art.1237
Article 1295. The insolvency of the new
debtor, who has been proposed by the
original debtor and accepted by the
creditor, shall not revive the action of the
latter against the original obligor, except
when said insolvency was already existing
and of public knowledge, or known to the
debtor, when the delegated his debt.
Effect of new debtor’s insolvency or non-fulfillment of the obligation
in delegacion:
General Rule: Original debtor is not liable to the creditor in case of
insolvency of the new debtor. The exceptions are:
a) The said insolvency was already existing and of public knowledge
(although it was not known to the old debtor) at the time of the
delegacion; or
b) The insolvency was already existing and known to the debtor
(although it was not of public knowledge) at the time of the
delegacion.

The exceptions are intended to prevent fraud on the part of the old
debtor.
Art. 1296. When the principal obligation is extinguished in consequence of a
novation, accessory obligations may subsist only insofar as they may benefit
third persons who did not give their consent. Referring to Stipulation Pour
Autrui.
Stipulation pour Autrui - where contract may either favor or
prejudice a third person. ( Art. 1311 par.2)
Requisites for Stipulation Pour Autrui:
1.The contracting parties by their stipulation must have clearly
and deliberately conferred favor upon a third person;
2. The third person must have communicated his acceptance to
the obligor before its revocation by the by the obligee or the
original parties.
3. The stipulation in favor of the third person should be a part,
not the whole, of the contract;
4. The favorable stipulation should not be conditioned or
compensated by any kind of obligation whatever; and
5. Neither of the contracting parties bears the legal
representation or authorization of the third party for
otherwise, the rule on agency will apply.
Article 1297. If the new
obligation is void, the original
one shall subsist, unless the
parties intended that the former
relation should be extinguished
in any event
Art. 1298. The novation is void if
the original obligation was void,
except when annulment may be
claimed only by the debtor or
when ratification validates acts
which are voidable.
Art. 1299. If the original obligation was
subject to a suspensive or resolutory
condition, the new obligation shall be
under the same condition, unless it is
otherwise stipulated. (n)
Article 1300. Subrogation of a third person in the rights of the
creditor is either legal or conventional. The former is not
presumed, except in cases expressly mentioned in this Code; the
latter must be clearly established in order that it may take effect.
KINDS OF SUBROGATION (Art. 1300)
Article 1301. Conventional subrogation of a third person requires
the consent of the original parties and of the third person.
Conventional Subrogation – when it takes place by express
agreement of the original parties. (The debtor, the original
creditor and the third person) Consent of all parties required.
Conventional Subrogation requires consent of all of the parties,
to wit, the debtor, the old creditor and the new creditor.
 Assignment of Credit Conventional Subrogation
There is mere transfer of the same right or Extinguishes the obligation and creates a
credit. The transfer did not extinguish new one
credit.
It does not require the debtor’s consent. Requires debtor’s consent
Mere notification to him is sufficient.

The defect in the credit or right is not cured
simply by assigning the same. Here, the
debtor generally has still the right to present
against new creditor any defense available
as against old debtor.
The defect of the old obligation may be
cured in such a way that the new obligation
becomes entirely valid. Thus here, there is
no right to present against new creditor any
defense which he, the debtor or could have
set up against the old creditor.

Here creditor is the one ceding or Here, somebody makes payment in behalf
transferring his rights. of the debtor with the latter’s consent.
Article 1302. It is presumed that there is legal subrogation:
(1) When a creditor pays another creditor who is preferred, even without
the debtor's knowledge;
(2) When a third person, not interested in the obligation, pays with the
express or tacit approval of the debtor;
(3) When, even without the knowledge of the debtor, a person interested in
the fulfillment of the obligation pays, without prejudice to the effects of
confusion as to the latter's share
Cases of Legal Subrogation:
a) When a creditor pays another creditor who is preferred (see arts. 2236,
2251)
b) When a third person without interest in the obligation pays with the
approval of the debtor;
c) When a third person with interest in the
obligation pays with the approval of the debtor.
What conventional subrogation?

• Art. 1303. Subrogation transfers to the persons

subrogated the credit with all the rights thereto
appertaining, either against the debtor or against
third person, be they guarantors or possessors of
mortgages, subject to stipulation in a conventional
subrogation. Under article 1235 subrogation includes
rights arising from
• Mortgage or pledge or other forms of security
• Guaranty
• Penalty or penal clause