EXTINGUISHMENT OF

OBLIGATIONS

JAYE R. BALBIN, ECE, MEP-ECE

MODE OF EXTINGUISHING AN

OBLIGATION

PRIMARY CLASS UNDER ART. 1231

Payment or performance

Loss of the thing due

Condonation or remission of the debt

Confusion or merger of the rights of creditor and debtor

Compensation

Novation

OTHER CAUSES

Annulment

Rescission

Fulfillment of a resolutory condition

Prescription

Occurrence of fortuitous event

Expiration of resolutory period

Impossibility of performance

Death of a party

Compromises

Insolvency and bankruptcy

SECTION 1 - PAYMENT OR

PERFORMANCE

Art. 1232 – Payment means not only the delivery of money

but also the performance, in any other manner, of an obligation

Payment – a mode of extinguishing an obligation which

consists of:

The delivery of money, or

The performance in any other manner of an obligation

Example:

If the obligation is to give a specific car, payment is made by delivering a

thing.

If the obligation is to repair a computer, payment is made by performing

the service.

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 maybe.

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.

Example:

Louie is obliged to paint red the car of Justin. Louie painted the car but the color bordered on maroon. Justin accepted the performance although it was irregular and he did not express any protest or objection to it. In this case, Louie is deemed to have fulfilled his obligation.

Art. 1234 – Payment made to the creditor by the debtor

after the latter has been judicially ordered to retain the

debt shall not be valid.

Garnishment - the proceeding in which the court

orders the debtor not to make payment to his creditor,

but to the creditor of his creditor

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.

Dacion en pago, adjudicacion en pago, datio in

solutum – an objective novation of the obligation where

the thing offered as an accepted equivalent of

performance is considered as the object of contract of

sale, while the debt is considered as the purchase price.

Art. 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.

Legal tender – the money or currency which a debtor

may compel his creditor to accept in payment of his debt,

whether public or private. It is the money that is legally

valid for the payment of debts and that must be accepted

for that purpose when offered.

Section 52 of RA. 7653 (the New Central Bank) as adjusted by Circular No. 537 issued on July 18, 2006, the following are legal tender in the Philippines:

One (1) sentimo, 5-sentimo, 10-sentimo, 25-sentimo coins are legal tender up to P100.

One (1) piso, 5-piso, 10-piso are legal tender up to P1000.

All bills are legal tender up to any amount.

Example :

Javier borrowed P5000 from Alexander. On due date, Javier tendered payment amounting to P5000 consisting of 5000 pieces of P1.00 coin. Here Alexander may validly refuse the payment being offered because P1.00 coins are legal tender only up to P1000.

Art. 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.

Inflation – a sharp sudden increase in money and credit or both without a corresponding increase in business transactions.

Extraordinary inflation – understood to be any uncommon decrease in the purchasing power of the currency which the parties could not have reasonably foreseen and has been due to war or the effect thereof, or any other unusual force majeure or fortuitous event.

Deflation – a sharp sudden decrease in money or credit or both without a corresponding decrease in business transactions.

Extraordinary deflation - understood to be any uncommon increase in the purchasing power of the currency which the parties could not have reasonably foreseen and has been due to war or the effect thereof, or any other unusual force majeure or fortuitous event.

Subsection 1 – APPLICATION OF

PAYMENTS (Art. 1252)

Application of payment – the designation of the debt to which payment shall be applied when the debtor owes several debts in favor of the same creditor.

Requisites of application of payment:

There must be two or more debts.

The debts must be of the same kind.

The debts are owed by the same debtor to the same creditor

All debts are due, except:

When the parties have stipulated that payment may be applied to a debt not yet due.

When the application to a debt not yet due is made by the party for whose benefit the term has been constituted.

The amount given in payments is not enough to cover all the debts.

Subsection 2 – PAYMENT BY CESSION

(Art. 1255)

Payment by cession – the abandonment or assignment

by the debtor of all his properties in favor of his creditors

so that the latter may sell them and recover their claims

out of the proceeds.

Requisites of payment by cession:

There must be two or more creditors

The debtor must be insolvent, either partially or completely.

The debtor abandons all his properties except those exempt

from execution

The creditors accept the abandonment.

Kinds of payment by cession

Voluntary or conventional – that which is agreed

upon by the parties and which requires the consent of all

the creditors.

Legal – cession by operation of law; this is governed by

the Insolvency Law and requires that majority of the

creditors must agree.

Subsection 3 – TENDER OF PAYMENT

AND CONSIGNATION (Art. 1256)

Tender of payment – the act of the debtor of offering

to the creditor what is due him.

Consignation – the act of depositing the sum or thing

due with judicial authorities whenever the creditor

refuses without just cause to accept the same, or in cases

when the creditor cannot accept it.

SECTION 2 – LOSS OF THE THING DUE

Art. 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 in fortuitous events, the loss of the thing due 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.

Art. 1263 – In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does not extinguish the obligation.

Loss – A thing is considered lost when it perishes, or

goes out of commerce, or disappears in such a way that

its existence is unknown or it can not be recovered. Loss

includes the physical or legal impossibility of the service

in which the obligation consists.

For loss to extinguish an obligation, it should occur after

the constitution of the obligation. If the loss occurred

prior thereto, the obligation would not have any subject

matter and will be considered void.

Art 1264 – The court shall determine whether, under

the circumstances, the partial loss of the object of the

obligation is so important as to extinguish the obligation.

Example:

Jolo agreed to deliver a specific horse which was meant for entry in

the derby race to Gerard. The right front leg of the horse, however,

was broken when the horse accidentally fell down a ditch. While the

horse could still walk, it could no longer run. In this case, the partial

loss of the leg is so important as to extinguish the obligation. If the

horse, however, was meant to be used as a modelin a portrait to be

painted by Gerard, the partial loss of the leg is not important as to

extinguish the obligation.

Art. 1265 – Whenever the thing is lost in the possession

of the debtor, it shall be presumed that the loss was due

to his fault, unless there is a proof to the contrary, and

without prejudice to the provisions of article 1165. This

presumption does not apply in case of earthquake, flood,

storm or other natural calamity.

Art. 1266 – The debtor in obligation to do shall also be

released when the prestations becomes legally or

physically impossible without the fault of the obligor.

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.

Example:

Tronqs agreed to drill manually a 25-meter deep well for Jackie. After

having drilled 10 meters, Tronqs found difficulty in drilling deeper

because he came upon a marble rock. Tronqs may be released from

his obligation, either in whole or in part.

Art. 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.

Example :

Tracy insured her house against fire with Bea’s Insurance Company.

Odessa burns the house. If Bea’s Insurance Company pays the policy

amount to Tracy, it shall have the right to recover from Odessa.

SECTION 3 – CONDONATION OR

REMISSION OF THE DEBT (Art. 1270)

Condonation or remission – is the gratuitous

abandonment by the creditor of his right. In plain

language, this refers to the forgiveness of indebtedness. To

extinguish the obligation, the consent of the debtor is

required.

Example:

Dexter borrowed P4,000 from Kimchi. The debt is evidenced by a

promissory note executed by Dexter. On due date, Kimchi informs

Dexter that he will no longer be collecting the debtand delivers the

note to Dexter. Dexter accepts Kimchi’s generosity. Dexter’s

obligation is extinguished by condonation or remission.

Kinds of condonation or remission

As to amount or extent

Total – when the obligation (both the principal and accessory

obligations) is extinguished.

Partial – when only part of the obligation, or only the

accessory obligation is remitted.

As to form

Express – one made orally or in writing. It must, to be valid,

comply with the formalities of donation.

Implied – one inferred from the conduct of the parties, such

as when the creditor voluntarily delivers the private document

evidencing the credit to the debtor.

As to date of effectivity

Inter vivos – one that takes effect during the lifetime of the

donor (creditor)

Mortis causa – one that takes effect upon the death of the

donor (creditor) and partakes of the nature of a testamentary

disposition.

Requisites of condonation:

The obligation must be damandable at the time of remission.

The cause or consideration must be the liberality of the

creditor.

This is so because condonation is essentially gratuitous. It is generally

presumed.

It must be accepted by the debtor.

It must not be inofficious.

The condonation is inofficious if it impairs the legitimate, i.e. The

portion of the estate which the law reserves for the compulsory

heirs.

Art. 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.

Example :

Armando issued a promissory note for P10,000 payable to the order

of Marloun After one month, the note was found in the possession of

Armando. There is here the presumption that Marloun voluntarily

delivered the note to Armando. Marloun, however is allowed to prove

that the note was taken from him without his consent, such as when it

was obtained from him by force or that it was stolen from him.

SECTION 4 – CONFUSION OR MERGER

OF RIGHTS (Art. 1275)

Confusion or merger – is the meeting in one person of

the characters of debtor and creditor. The obligation here

is extinguished because it is now absurd for the creditor

to claim payment from himself.

Example:

JL issues a promissory note payable to the order of Luis. Luis indorses

the note to Jhong, Jhong indorses the note to Billy, Billy indorses the

note back to JL. The obligation here is extinguished because JL, the

debtor and maker of the note, is now the creditor of himself.

Art. 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 in the person of the principal debtor or

creditor when there is a guarantor.

Merger in the person of the principal debtor or creditor

benefits the guarantor.

Art. 1277 – Confusion does not extinguish a joint obligation except as regards to the share corresponding to the creditor or debtor in whom the two chracters concur.

Merger in joint obligation

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:

Janette, Jenny and Flor, joint debtors, issued a promissory note for P30,000 payable to Marian. Marian assigns the note to Cha, Cha to Cyrel, and Cyrel to Janette. Here only Janette’s share amounting to P10,000 is extinguished because it is only in her person where the qualities of debtor and creditor concur. Jenny and Flor are still liable for P20,000 to Janette who is now the new creditor.

Merger in solidary obligation

Merger in one of the solidary debtors or solidary creditors extinguishes the whole obligation. (Art.1215). The solidary debtor in whom the characters of debtor and creditor concur can demand reimbursement from his co debtors. (Art. 1217). In the case of solidary creditors, he shall be liable to his co-creditors for the share corresponding to each of them. (Art. 1215)

Example:

Richard, Ron and Ralph, solidary debtors, issued a promissory note for P30,000 payable to Apol. Apol assigns the note to Teya, Teya to Kaye and Kaye to Richard. Here, the entire obligation is extinguished with all the debtors now being the creditors. Richard, however, can go after Ron and Ralph for reimbursement at P10,000 each. It is as if Richard paid the whole obligation.

SECTION 5 – COMPENSATION (Art. 1278)

Compensation – mode of extinguishing an obligation

when two persons, in their own right, are debtors and

creditors of each other.

Example:

Arjay owes JR P10,000. JR owes Arjay P10,000. Both debts are due.

The parties need not pay each other as their obligations are

extinguished by compensation.

Kinds of compensation

As to amount or extent

Total – when the debts are of the same amount. (Art. 1281)

Partial – when the debts are of different amounts. (Art. 1281)

As to cause or origin

Legal – one that takes place by operation of law. (Art. 1279). It operates even against the will of the interested parties and even without their consent. Such compensation takes effect, ipso jure (which means “by the law itself”)

Voluntary or conventional – one that takes place by agreement of the parties. (Art. 1282)

Judicial – one that is ordered by the court. (Art. 1282)

Facultative – one that may be claimed or opposed by one of the parties. (Art. 1287, 1288)

Assignment of credits – a contract whereby a person

(assignor) transfers his credit, right or action against a

third person to another (assignee) for a consideration

certain in money or its equivalent. (Art. 1458, 1475 and

1624)

Example:

Gerard owes Kim P10,000. The debt is evidenced by promissory note

executed by Gerard and payable to Kim. Kim assigns the note to

Simon with notice to Gerard. The contract between Kim and Simon is

known as assignment with Kim as the assignor and Simon , the

assignee. Gerard will have to make the payment to Simon and no

longer to Kim.

Deposit – a contract whereby a person receives a thing

belonging to another with the obligation of safely keeping

it and of returning the same.

Commodatum – a contract whereby a party delivers to

another a non-consumable thing so that the latter may

use the same for a certain time and return it. (Art. 1933)

SECTION 6 – NOVATION (Art. 1291)

Novation – the modification or extinguishment of an

obligation by another, either by changing the object or

pricipal condition, substituting the person of the debtor,

or subrogating a third person in the rights of the creditor.

(Art. 1291)

Novation has a dual function in that at the time it

extinguishes an obligation, it creates a new one in lieu of

the old.

Kinds of novation

According to object or purpose

Real or objective novation– novation by changing the

object or principal condition.

Personal or subjective novation– novation by change of

the parties (debtor or creditor)

Substituting the person of the debtor, which may be by expromision or

delegacion. (Art. 1293, 1294 and 1295)

Subrogating a third person in the rights of the creditor, which may be

conventional or legal. (Art. 1300-1302)

Mixed novation – change of object and parties

According to form

Express novation – novation declared in unequivocal terms.

(Art. 1292). i.e. Novation by express declaration of the parties.

Implied novation – when the old and the new obligation are

on every point incompatible with each other. (Art. 1292)

According to extent

Total or extinctive novation – when the old obligation is

totally extinguished.

Partial or modificatory novation – when the old obligation

remains in force except as it has been modified; also called

imperfect or improper novation

Kinds of novation by substitution of the

person of the debtor

Expromision – this is substitution of debtors initiated by

a third person who assumes the obligation with the

creditor’s consent.

Delegacion – this is substitution of debtors initiated by

the debtor himself where a third person assumes the

obligation with the creditor’s consent.

Subrogation – the substitution of another person in the

place of the creditor, so that the person in whose favor it

is exercised succeeds to the right of the creditor in

relation to the debt.

Example:

Jose obtained a loan of P1,000,000 from Wally. The debt is guaranteed

by Paolo. Later, Wally assigned the credit to Jimmy with consent of all

the parties. The rights of Wally against Jose and Paolo are transferred

to Jimmy. Thus, Jimmy acquires the right to collect from Jose. If Jose

cannot pay, Jimmy can proceed against Paolo, the guarantor.

Kinds of subrogation

Conventional subrogation – one that takes place by

agreement of the original parties and the third person.

(Art. 1301). This must be clearly established in order that

it may take effect. (Art. 1300)

Legal subrogation – one that takes place by operation

of law.

EXTINGUISHMENT OF OBLIGATION-

(THE END!)

ANG SIMULA NG KATAPUSAN AY NGAYON! (Art. 1193)...

OBLIGATION lang walang personalan...(Art. 1156) Kung babagsak ka ibig sabihin nagkulang ang ibinigay mo para mapunan ang iyong obligasyon... (Art. 1163) O hindi sapat ang mga karanasan mo na katulad ng iba at hindi umabot sa pamantayan sa pagtupad ng obligasyon (Art 1170)..

Sinasabing ang pagtatapos ng isang obligasyon ay makukuha sa pagpuno ng lahat ng kinakailangan ibigay at ito ay dapat na kumpleto. –Extinguishment of obligation by performance. (Art. 1233)

Sa mga magkukulang see you next term for the fulfillment of your obligation. (Art. 1193)