OBLIGATIONS

"If you want something you've never had before then you've got to do something you've never done
before" - :)

Definition according to the Civil Code of the Philippines: obligation is a juridical necessity
to give, to do, or not do (Art. 1156).

Juridical Necessity means that the court can be asked to order the obligor to perform the
obligation.

As many noticed, this definition stresses merely the duty of the debtor (passive element)
without emphasizing the corresponding right on the part of the creditor (the active element).
Justice JBL Reyes then quotes the following definition given by Arias Ramos:

An obligation is a juridical relation whereby a person (the creditor) may demand from
another (the debtor) the observance of a determinative conduct (the giving, the doing or
not doing), and in case of breach, may demand satisfaction from the assets of the latter.

Furthermore, these definitions refer to civil obligation since a natural obligation cannot
be enforced by court action. The former is based on positive law while the latter is based on
natural law and exists in equity and moral justice. Moral obligations cannot be enforced
by courts as well as these are based on the laws of the church, and not positive law.

Requisites of Obligation

1. Active Subject = creditor/obligee = one who has the right to demand

performance of the obligation

2. Passive Subject = debtor/obligor = one who is obliged to perform the obligation.

3. Prestation = the subject matter of the obligation.

Prestations in

Real Obligation = the thing, whether determinate or generic

Personal Obligation = the services or acts

4. Efficient Cause = the vinculum or the legal or juridical tie that binds the parties to
an obligation. It may consist of any of the five sources of obligation.

Sources of Obligation

1. Law. However, only those expressly determined in the Civil Code or in special laws
are demandable, and shall be regulated by the precepts of the law which establishes
them; and as to what has not been foreseen, by the provisions on Obligations. We
cannot presume existence of an obligation if no express provision is stated in our
laws.

2. Contract a meeting of minds between two persons/parties whereby one binds

himself, with respect to the other, to give something or to render some service.

3. Quasi-contracts Certain lawful, voluntary and unilateral acts done by a person

giving rise to a juridical relation to the end that no one shall be unjustly enriched
 by another (Art. 2142). Examples: Negotiorum Gestio and Solutio Indebiti

Negotiorum Gestio voluntary administration of the property, business, or affairs of

another without the latters consent or authority.

Solutio Indebiti payment by mistake. This creates an obligation to return the payment.

Big Distinction between Contracts and Quasi-Contracts some of you may think that
a Quasi-Contract is an implied contract. However, it is not. For in contracts, whether implied
or expressed, the meeting of minds has always occurred. In quasi-contracts, on one hand,
there was never a meeting of minds.

4. Delicts (a.k.a. crimes or felonies) acts or omissions punishable by Law. According

to the Revised Penal Code, the commission of a crime makes the offender also civilly
liable.

5. Quasi-delicts (a.k.a. tort or culpa aquiliana) = acts or omissions that cause

damage to another, there being no contractual relation between the parties (Art.
2176).

Distinctions between Delicts and Quasi-Delicts

DELICTS QUASI-DELICTS

Does not necessarily cause damage All kinds of quasi-delict cause damage...

As long as the act is punishable by law, but none is punishable by law

then the act is a delict/crime.
May not necessarily be based on fault or Based on fault or negligence.
negligence.

Note: The enumeration listed above is based on Art. 1157 of the Civil Code of the
Philippines. However, many critics believe that the list is not scientific. They say that there
are only two sources of obligations: law and contracts because obligations arising from
delicts, quasi-delicts and quasi-contracts are provided for by law.

Distinctions between Contracts and other sources of Obligation

CONTRACTS OTHER SOURCES

Obligation is provided by the contract itself. Obligation is provided by law.

Requires the concurrence of both parties. Does not require the concurrence of both
parties.

Based on what was agreed upon by the Based on what was provided by laws.
parties.

NATURE AND EFFECT OF OBLIGATIONS

Determinate Thing = one that is particularly designated or physically segregated from all
others of the same class. The opposite is the generic thing.

Why is there a need to determine whether the prestation is determinate or

generic? A generic thing can be replaced while a determinate thing cannot. If the latter is
lost due to a fortuitous event, the obligation is generally extinguished while if the former is
lost due to the same circumstance, the obligation subsists for the obligor can look for the
same item elsewhere.

Duties/Obligations of the Obligor

If Generic:

1. To deliver the thing of the same class but of neither inferior nor superior quality.
2. If the thing is lost due to fortuitous event or due to his (the obligor) own fault, to look
for another item of the same class elsewhere and deliver the same to the creditor.

If Determinate:

1. To take care of the thing with the diligence of a good father of a family.
However, if theres a higher standard of care expressly stated by the provisions of
law or expressly stipulated by the contract, that higher standard of care should be
followed.
2. To deliver the thing.
3. To deliver the fruits of the thing from the moment the obligation to deliver arises.

Fruits are those that the thing has given existence to. Normally, the delivery of these is
included as obligation from the moment the obligation to deliver the prestation arises.

When does the moment the obligation to deliver arise?

It depends upon the kind of obligation:

In obligations without a condition or a period, this moment arises at the perfection

of the contract. (PURE obligation)

In obligations with a period, this moment arises on the date of due.

In obligations with a suspensive condition, this moment arises at the moment the
condition occurs.

In obligations with a resolutory condition, this moment arises at the perfection of

the contract.

4. To deliver the accessions and accessories even if they have not been mentioned.

Accessions these are improvements of the thing.

Accessories those joined to or included with the principal for the latters completion,
better use, perfection or enjoyment.

Rights of the Creditor

If the Prestation is a Generic Thing:

1. He may ask for performance of the obligation.

2. He may possess anything within the same class at the expense of the debtor.
3. He may demand damages.
If the Prestation is a Determinate Thing:

1. He may compel the debtor to deliver the thing. Nobody else is in possession of the
same thing in this entire world.
2. He may demand damages.

If the Prestation is a Service/Act:

In all cases, the debtor cannot be compelled to do the act for this would violate his right
against involuntary servitude. However, the creditor can still have the following remedies
depending on the following cases:

a. If the debtor fails to perform or if he did perform but in contravention of the tenor -

1. The creditor may perform the act or may ask somebody else to perform the act at
the expense of the debtor.
2. The creditor may demand damages.

b. If the debtor performs the obligation poorly

1. The creditor may have the same be undone at the expense of the debtor.
2. The creditor may demand damages.

If the Prestation is a Service/Act that is Forbidden:

1. The creditor may demand the debtor what has been done be undone at the expense
of the debtor.
2. The creditor may demand damages.

Speaking of Damages, what is it? Damages refers to the harm done and the
compensation that can be received by the offended party as a result of such harm.

What are the grounds for liability to pay Damages? These are Fraud, Negligence,
Delay, and Contravention of the tenor of the obligation.

Fraud is the voluntary execution of a wrongful act, or a willful omission, knowing and
intending the effects which will arise from such act or omission.

Kinds of Fraud

a. According to meaning
1. Fraud in obtaining consent this kind of fraud has an effect on the validity of
the contract as this occurs before and during the formulation of contract. The
remedies available to the offended party would depend if the fraud is causal or
incidental.
a. Causal Fraud or Dolo Causante fraud done that without it, consent
wouldve not been given. This renders the contract voidable.
b. Incidental Fraud or Dolo Incidente fraud done that without it, the
creditor wouldve agreed in different terms. The contract remains valid but
the party offended is entitled to damages.
2. Fraud in the performance of the obligation the deliberate or intentional
evasion by the debtor of the fulfillment of his obligation in a normal manner. This
type of fraud does not affect the validity of the contract.
b. According to time of commission
 1. Future Fraud. If the two parties agreed to waive an action on future fraud, such
waiver is considered void because permitting such advance renunciations would
practically leave the obligation without effect. Thus, the debtor will still be liable for
damages if he commits fraud in the performance of his obligation despite the waiver.
2. Past Fraud. If the two parties agreed to waive an action on past fraud, such waiver
may be considered valid. This can be validly renounced because it is deemed an act of
generosity of the creditor. What is renounced is the effect of fraud, particularly the
right to indemnity. This is an act of liberality on the part of the creditor.

Negligence (Culpa) this is the omission of the diligence required by the nature of the
obligation (as stated by law or stipulated in the contract) and corresponds with the
circumstances of the person, time, and of the place.

If neither the law nor the contract state the standard of care that is needed while the thing is
in the hands of the debtor, the debtor must observe the diligence of a good father of a
family.

Kinds of Negligence

1. Culpa Contractual (contractual negligence) this is the omission of the diligence

required by the contract.
2. Culpa Aquiliana (civil negligence/tort/quasi-delict/culpa extra-contractual)
these are omissions that cause injury to another, there being no existing contractual
relationship between the parties.
3. Culpa Criminal (criminal negligence) this is an omission that is punishable by law.
This is a crime known as Reckless Imprudence.

Distinction between Fraud and Negligence the element of intention to cause damage
is present in Fraud but is absent in Negligence.

Delay this is the non-fulfillment of the obligation beyond the due date.

Kinds of Delay

1. Mora Solvendi delay on the part of the debtor (delay in fulfilling the
obligation)
2. Mora Accipiendi delay on the part of the creditor. This happens when on the
due date, the creditor refuses to accept the prestation due without any
justifiable reason.
3. Compensation Morae delay in reciprocal obligations; i.e., both parties are in
default. Here, it is as if there is no delay.

Requisites of Delay

1. Due date has arrived.

2. The creditor has already demanded performance of the obligation.
3. The debtor does not perform the obligation even after the creditor has already
demanded.

Without creditors demand, theres no delay. However, there are instances when demand
is no longer necessary for the delay to exist. These are the following:

1. When the law so provides.

2. When the obligation expressly so declares (depends upon the agreement of both
parties).
 3. When time is of the essence.
4. When out of the fault of the debtor, the demand has become useless (such as when
the prestation is lost).
5. In reciprocal obligations where the obligations arise from the same cause and the
date of due is the same between parties, once one of the parties fulfills his obligation,
the other party automatically incurs delay without the need for demand.

In an obligation not to do, there is never a delay for one cannot be in delay for not doing
something.

Effects of Delay

1. The offending party shall be liable for damages.

2. If the prestation is a determinate thing and a fortuitous event caused the debtor to
lose the thing, he shall be liable for the amount of the thing.

What happens to the obligation if a fortuitous event takes place and causes the
loss of the prestation? As stated earlier, the answer would depend on whether the
prestation is a determinate thing or a generic thing. If generic, the obligation subsists. If
determinate, the obligation is generally extinguished except in the following cases:

1. When the law expressly provides. Example: under Art. 1165 of the Civil Code, the
debtor would still be liable if he has incurred a delay or has promised himself to
deliver the thing to two persons of different interests.
2. When the parties have agreed to declare liability even in case of fortuitous event.
3. When the nature of obligation requires the assumption of risk. Example: the liability
of an insurer in case of a loss. Unlike any other obligation, the liability of an insurer is
exactly the opposite: it arises after a fortuitous event occurs.

Remedies Available to Creditors to Enforce the Obligation

In the event of breach of obligation, the creditor has the following remedies:

1. Pursue the debtors properties except those exempt by law. This is usually
done through attaching the properties. If the court has decided in favor of the
creditor, the court may order that the properties belonging to the debtor be sold and
the proceeds thereof be applied as payment of his obligation.

2. Exercise the rights belonging to the debtor except those personally

belonging to him (accion subrogatoria). In case the debtor has his own debtor in
another obligation, the creditor may file a court action directing the debtors debtor
to pay the creditor. In effect, the creditor is exercising the right to collect from the
debtors debtor which is a right that belongs to the debtor.

3. Impugn the acts made by the debtor that may have been done to defraud
his creditors (accion pauliana). In cases where the determinate thing is sold by
the debtor towards another person, the creditor may ask the court to rescind the sale
made by the debtor.

DIFFERENT KINDS OF OBLIGATIONS

1. According to Time pure, conditional and obligations with a period

2. According to Prestation simple, conjunctive, alternative and facultative
3. Obligations with 2 or more passive/active subjects joint and solidary
4. According to divisibility divisible and indivisible
 5. Obligations with penal clause

According to Time

1. Pure Obligations these are obligations without a condition or a period. Once the
contract is perfected or when the court has ordered the payment of liability in
obligations arising from law, the obligation is demandable at once.
2. Conditional Obligations these are obligations whose demandability or
extinguishment depends upon the happening of a condition. The probability that the
condition will happen is never a hundred percent.

What is a condition? It is an uncertain event that wields an influence on a legal

relationship (Manresa). It is that event that causes the demandability or extinguishment of
the obligation. However, it is uncertain. Hence, no one knows when it will and whether it will
happen.

Kinds of Condition

As to the demandability or extinguishment of the Obligation

a. Suspensive the happening of which gives rise to the obligation.

b. Resolutory the happening of which extinguishes the obligation. At the perfection of
the contract, the obligation is demandable at once but it shall be extinguished upon
the happening of the condition.

As to the will of a person

a. Potestative the happening of which depends upon the will of any of the parties.
i. Potestative on the part of the debtor
1. If suspensive the obligation is void for this rests upon the will of the debtor.
The law considers this as a void obligation because of the lack of
seriousness in the part of the debtor. Even if the condition is fulfilled, the
obligation is not demandable.
2. If resolutory the obligation is valid.
ii. Potestative on the part of the creditor this is valid whether resolutory or
suspensive.
b. Casual the happening of which depends upon the will of a third party or upon
chance.
c. Mixed combination of Potestative and Casual

Query

I will give you my car if I can sell my land. Suppose I am able to sell my land, am I bound
to give you my car?

Answer: It appears that the obligation is Potestative on the part of the debtor (and therefore,
void). However, this is not entirely Potestative. This is a mixed obligation for the condition
does not only depend upon the will of the debtor, but also upon the availability and the
willingness of the buyer (of the land).

3. Obligations with a Period these are obligations whose demandability or

extinguishment depends upon the arrival of an event or the date set. What sets
these obligations apart from conditional obligations is the fact that the probability
that the event will happen is always a hundred percent. In other words, there is a
day certain when the obligation will arise or cease.
Period is a space of time which determines the effectivity or extinguishment of an
obligation.

Day Certain is that day that must necessarily come although it may not be known when.

Kinds of Period

1. Ex Die period with a suspensive effect. Here, the obligation is demandable after a
lapse of a period.
2. In Diem period with a resolutory effect. Here, the obligation is demandable at once
but will be extinguished after a lapse of a period.

Query

I will pay you my debt when my means permit me to do so. Is this an obligation with a
period or with a condition?

Answer: Although it may seem that this obligation appear as one with a condition that
depends upon the will of the debtor (and therefore apparently VOID according to the Civil
Code), the fact remains that payment does not depend on the debtors will, for indeed he
has promised payment. What depends really on him is not payment, but the TIME when
payment is to be made. Hence, the law under Article 1180 deems this obligation as one with
a TERM or PERIOD.

The remedy available to the creditor is to ask the court to fix the term.

Who has the benefit of the period?

Whenever a period is designated in the obligation, it shall be presumed that it is for the
benefit of both parties, unless from the tenor or other circumstances, it should appear that it
has been established for the benefit of only one of the parties.

If only one of the parties has the benefit of the period, the debtor cannot be compelled to
perform the obligation or the creditor cannot be compelled to accept performance before
the term expires.

Examples

1. For the benefit of the debtor: Kent is obliged to give Karen 10 boxes of
chocolates on or before February 29, 2012. Kent may have the option to pay
anytime before February 29, 2012 lapses but he cannot be compelled to pay
before this date.
2. For the benefit of the creditor: Karen borrowed 10,000 pesos from Kent
collectible on or before December 31, 2009. Kent may demand payment
anytime before December 31, 2009 lapses but he cannot be compelled to
accept payment before this date.

If the debtor has the benefit of the period, he may lose it under some circumstances. If he
loses it, the creditor has the right to demand immediate payment. Article 1198 enumerates
the following circumstances:

1. When the debtor has become insolvent, unless he has given a guaranty or a security for
the debt.
2. When he does not furnish guaranties or securities that he has promised.
3. When through his own faults, the guaranties or securities have been impaired, or
through fortuitous events, these disappear, unless he furnishes new ones equally
satisfactory.
4. When he violates any undertaking in consideration of which the creditor agreed to the
period.
5. When he attempts to abscond.

According to Prestations

1. Simple there is only one prestation

2. Compound there are several prestations
a. Conjunctive several prestations are due and all must be performed
b. Distributive or Disjunctive several prestations are due but the debtor can
perform only one. This may either be alternative or facultative.

Alternative Obligation this is an obligation in which there are several prestations but a
performance of any of them is sufficient to extinguish the obligation.

Who has the right to choose the prestation? The right of choice belongs to the debtor,
unless it has been expressly given to the creditor.

However, there are certain limitations on the debtors right of choice:

1. If he has communicated his choice to the debtor, his only option is to deliver his
choice.
2. He cannot choose those prestations which are impossible, unlawful or which could
not have been the object of the obligation.

Circumstances when the alternative obligation becomes a simple obligation:

1. When the debtor has communicated his choice to the creditor.

2. When after some events and circumstances, only one prestation is left practicable.
3. When the creditor has communicated his choice to the debtor, if he has been
expressly given the right of choice.

What happens if one or more of the prestations are lost? It depends upon the circumstance.

1. When right of choice belongs to the debtor

a. If some of the prestations are lost due to fortuitous event or through the
debtors fault, the debtor may deliver any of the remaining prestations.
b. If all of the prestations are lost, it depends upon whether it was the fault of
the debtor or not.
i. If debtors fault the debtor shall pay the value of the last thing lost
plus damages
ii. If due to fortuitous event the debtors obligation is extinguished

2. When right of choice belongs to the creditor

a. If some of the prestations are lost
i. If due to a fortuitous event, the debtor may deliver the prestation
which the creditor has chosen or if only one remains, he may deliver
the remaining.
ii. If due to the debtors fault, the creditor may choose between the
value of the prestation he likes (if it was lost) plus damages or any
of the remaining prestations
b. If all the prestations are lost
 i. If due to a fortuitous event, the obligation is extinguished.
ii. If due to the debtors fault, the creditor may demand payment of
the value of the prestation he likes plus damages.

Facultative Obligation this is an obligation where there is one principal prestation but
the debtor has the option to deliver another as an alternative.

What if the principal prestation is lost? The answer would depend on whether the debtor has
already communicated the substitution or not.

If substitution has not yet occurred

a. Due to fortuitous event the obligation is extinguished
b. Due to debtors fault debtor shall be liable for damages.
If substitution has already occurred whether it is due to a fortuitous event or due to
debtors fault, there is no effect for there is no more obligation to deliver the principal
thing. After the substitution has occurred, the thing due now is the substitute and not
the principal.

What if the substitute is lost? The answer would also depend on whether the debtor has
already communicated the substitution or not. However, the same would be completely the
opposite of the above.

1. If substitution has not yet occurred whether it is due to a fortuitous event or due to
the debtors fault, there is no effect for there is no obligation to deliver the substitute.
The debtor may just deliver the principal thing.
2. If substitution has already occurred
Due to fortuitous event the obligation is extinguished.
Due to debtors fault debtor shall be liable for damages.

Joint and Solidary Obligations

These are obligations with the concurrence of two or more debtors and creditors.

Joint Obligations these are obligations with debtors who shall each answer only for the
proportionate part of the debt, and/or the creditors who shall each demand only the
proportionate part of the credit. To each his own.

Solidary Obligations these are obligations with debtors who shall each answer for the
full amount of the debt, and/or the creditors who shall each demand for the full amount of
the credit. All for one, one for all.

Examples

We promise to pay Raymond Andes the sum of P30,000.

Signed by: Kent Cardino, Angel Openiano, and Karen Obligacion

I promise to pay Raymond Andes the sum of P30,000.

Signed by: Rey Redoblado, Yeng Monasterial, and Kathleen Endrano

Unless otherwise stated, the obligation with 2 or more debtors and/or creditors shall be
presumed to be Joint. However, there are instances when express statements are not
necessary for the obligation to be considered Solidary:
1. When the law so requires such as in obligations arising from torts, quasi-contracts and
crimes.
2. When the nature of the obligation requires solidarity.

Query

Kent, Bok and Karen are solidarily liable to Barbz for 300,000 pesos subject to the following
terms: the share of Kent is payable on the date of his marriage to Pokwang; the share of Bok
is payable on the next blue moon; and Karens share is payable when Barbz passes the CPA
board exam. When and to whom can Barbz demand payment assuming the following
additional details?

June 15, 2009 Kent-Pokwang Nuptials

September 29, 2009 the date of the next blue moon
October 19, 2009 the day Barbz passes the board exams

Answer: On June 15, Barbz can demand payment of Kents share from Kent, Bok or Karen.
On September 29, Barbz can demand payment of Boks share from Kent, Bok or Karen. On
October 19, Barbz can demand payment of Karens share from Kent, Bok or Karen.

According to Divisibility

Divisible Obligations one capable of partial performance.

Indivisible Obligations one not capable of partial performance.

Obligations with a Penal Clause these are obligations which provide for a greater
liability on the part of the debtor in case of non-compliance. The accessory undertaking on
the part of the debtor is called a penal clause.

Proof of actual damages suffered by the creditor is not required for the penalty be
demanded.

The penalty can take the place of damages and interest in case of non-compliance except
in the following cases:

1. When there is a stipulation to that effect.

2. When the debtor has committed fraud.
3. When the debtor refuses to pay penalty.

Can the debtor pay the penalty only instead of performing the principal? No, unless it is
expressly reserved. The reason is that if he can pay penalty alone without the principal, the
latter will be considered just a substitute, which actually violates the very nature of the
obligation. Remember, this is not a facultative obligation.

Can the creditor demand the fulfillment of both the obligation and the payment of the
penalty? As a general rule, this is not allowed unless such right is clearly granted to him.

It should be noted that to permit the debtor to pay the penalty as a substitute for
performance, that right must be EXPRESSLY given to him. On the other hand, to allow the
creditor to demand both the fulfillment of the obligation and the payment of the penalty, it is
NOT necessary that this right be EXPRESSLY given him, it is sufficient that such right has
been CLEARLY granted to him.

The nullity of the principal obligation carries with it the nullity of the penal clause but the
nullity of the penal clause does not have any effect on the principal obligation. This is so
because the principal obligation can stand by itself.

EXTINGUISHMENT OF OBLIGATIONS

According to Article 1231, obligations are extinguished by the following ways:

1. By payment or by performance;
2. By loss of the thing due;
3. By remission or condonation;
4. By merger or confusion;
5. By compensation;
6. By novation

Other reasons as provided by Soriano:

7. By annulment of contract
8. By rescission of contract
9. By fulfillment of resolutory condition
10. By prescription

Payment or Performance this is the fulfillment of the obligation. However, there are
some certain rules to follow:

1. The debtor cannot compel the creditor to accept a prestation different from the one
promised/agreed notwithstanding the quality of the prestation.
2. In obligations to deliver a generic thing, the obligor cannot deliver a thing of inferior
quality neither can the obligee demand a thing of superior quality.
3. The payment or performance must be complete. The creditor cannot be compelled to
accept partial performance.
4. If the obligation is in the form of money, payment should be in legal tender.

What is a legal tender? Legal tender is the money or currency the debtor can compel the
creditor to accept.

Under Section 52 of RA 7653 (The New Central Bank Act), if the payment is made in the form
of coins, this shall be acceptable as a legal tender in the following amounts:

1. For twenty-five centavo coins and above, legal tender is up to P 50.00.

2. For ten centavo coins and below, legal tender is up to P 20.00.

All bills are legal tender up to any amount.

What are the things the debtor needs to have in possession to make the payment
valid?

1. He must have the free disposal of the thing due. It must be free of claims by or
encumbrances in favor of third persons.
2. He must have the capacity to alienate the thing. The debtor must not be incapable
of giving consent

What happens if the incapacitated debtor makes payment? If the payment is made, the
guardian of the incapacitated person or the incapacitated person, when he gains capacity,
may seek the annulment of payment. This is subject to exceptions.
What happens if a Third Person makes payment? The creditor is not bound to accept
payment except in the following cases:

1. There is stipulation to that effect

2. The third person has interest in the fulfillment of obligation such as a guarantor or a
co-debtor.

What are the rights of a Third person who makes payment? The rights of a third
person vary based on the existence or non-existence of the consent of the debtor.

1. If the debtor has consented, the third person may recover what he has paid from the
debtor. Plus, he is entitled to be subrogated in the rights of the creditor.
2. If without the debtors knowledge or against his consent, the third person may only
recover what has benefited the debtor and he is not entitled to be subrogated in the
rights of the creditor.

To whom should the debtor offer his payment?

1. To the creditor
2. To the creditors successors in interest, such as his assigns or heirs
3. To any person authorized to receive payment
4. In the case of garnishment, to the creditors creditor

Special Forms of Payment

1. Dation in payment / Dacion En Pago

2. Cession
3. Application of Payment
4. Tender of payment and Consignation

Dacion En Pago this is a special form of payment where the debtor asks the creditor to
accept the ownership of a property in lieu of the original obligation. Article 1245 provides
that this form of payment shall be governed by the law on sales. However, the modern
concept of dacion en pago considers it as a novation by change of the object (Tolentino).
Thus, the provisions on sales and novation both apply to dacion en pago.

Cession this is a special form of payment in which the creditors are authorized to sell all
of the debtors properties and the proceeds thereof are applied to the credits of several
creditors.

Dacion En Pago Cession

In favor of only one creditor There are various creditors

Payment extinguishes the obligation to the Extinguishes credits only up to the extent of
extent of the value of the thing delivered proceeds from sale of assigned property,
unless the parties agree that the obligation unless otherwise agreed upon.
be totally extinguished.
Transfer of ownership of thing alienated to Only possession and administration with
creditor authorization to convert property to cash
with which the debts shall be paid

Debtor is not necessarily in state of financial Assignment presupposes insolvency of

difficulty debtor
 Assignment of only some specific thing Assignment involves all the properties of the
debtor

-taken from UP Law Bar-Ops Reviewer

Application of Payment this is a special form of payment where the debtor applies his
available funds in payment of several debts due to the same creditor.

Who has the right to apply payment? As a rule, the debtor has the right to apply
payment. But if the debtor does not designate his payment, the creditor may choose to
which debt the payment must be applied. If both the debtor and the creditor have not made
the designation, the following rules shall be applied:

1. The payment must be designated to the most onerous.

Query: Which obligation is more burdensome?

1-year old debt 3-year old debt

Loan with 10% annual interest Loan with 6% semi-annual interest

Debenture Bonds Loan with chattel mortgage

Simple Obligation Solidary Obligation

2. If all the debts are of the same burden, the payment must be applied proportionately.

Tender of payment is the act of the debtor of offering the creditor what is due to him.

Consignation is the remedy available to the debtor when after the tender of payment,
the creditor refuses to accept or the creditor cannot accept it. This is the act of depositing
the prestation in the hands of judicial authorities.

Steps necessary for the tender of payment and consignation to properly extinguish the
obligation:

1. There must be a valid tender of payment.

2. The creditor refuses to accept payment without justifiable reason.
3. Persons who are interested in the fulfillment of the obligation are given notice that there
is intent to make consignation.
4. The sum or the thing due is deposited with the judicial authorities.
5. Persons who are interested in the fulfillment of the obligation must be given notice that
the consignation has taken place.

What happens when one or two of the steps above are not undertaken?

1. The obligation remains for the consignation is not effective.

2. The debtor will be considered in default.

However, these are the instances when, even without tender of payment, consignation will
still take effect:

1. When the creditor is absent or unknown or does not appear at the place of payment.
2. When there are 2 or more persons who claim the same obligation.
 3. When the creditor is incapacitated.
4. When the title of the obligation is lost.
5. When without cause, the creditor refuses to give a receipt.

The obligation is extinguished at the point when the creditor has accepted the thing due or
when the judge has declared that consignation has been properly made.

Can the debtor withdraw the sum or thing due while consignation is taking place?
Yes, but the effects would be different depending on the time that it is made.

If BEFORE the creditor has accepted the consignation OR the judge has declared that the
consignation has been made, withdrawal produces the following effects:

1. The obligation continues to exist.

2. The guarantors, sureties and co-debtors are not released.

If AFTER the creditor has accepted the consignation OR the judge has declared that the
consignation has been made, withdrawal produces the following effects:

1. The obligation is revived.

2. The creditor loses his preference over the thing.
3. The guarantors, sureties and co-debtors are released.
Note: This only happens when the creditor consents to the debtors withdrawal. The third
persons are released because otherwise, they will be prejudiced by the revival of the
obligation.

Loss of the Thing Due

A thing is deemed lost when it perishes, or goes out of commerce, or disappears in such a
way that its existence is unknown or cannot be recovered.

Loss includes physical or legal impossibility of the service in which the obligation consists.

As a rule, the obligation is usually extinguished when the loss of the determinate thing
or service is due to fortuitous events. However, in the following cases, the obligation
subsists even if the prestation is lost due to fortuitous event:

When debtor has incurred in delay.

When the law so provides.
When the parties stipulated.
When the nature of obligation requires the assumption of risk.
When the debt proceeds from a criminal offense unless the person who should
receive it refuses to accept without justifiable reason.

Loss of a generic thing or service or loss due to debtors fault does not extinguish the
obligation.

Condonation or Remission

Condonation or Remission is the gratuitous abandonment of the creditor of his right to

demand performance of the obligation. This refers to the forgiveness of the indebtedness. As
a rule, the debtors consent is required for the extinguishment of the obligation to happen.

Condonation is treated by law as a donation. Therefore, it must comply with the formalities
of a donation to be valid:
 1. When the remission involves a real property, remission and acceptance should be in
the form of a public instrument to be valid.
2. When the remission involves a movable/personal property
a. If the propertys value exceeds 5,000 pesos, remission and acceptance should
be in writing, whether in public or in private, to be valid.
b. If the propertys value does not exceed 5,000 pesos, remission and
acceptance can take any form.

Confusion or Merger

Confusion or Merger is the meeting in one person the characters of both the debtor and the
creditor.

Example: Kent makes a promissory note payable to Karen or order. Karen indorses the note
to Sarj, Sarj to Neri, Neri to Rey, and back to Kent. The obligation is now extinguished as
Kent is now the creditor of himself.

What happens to Guarantors in Confusion?

1. If the principal debtor takes the place of both the debtor and the creditor, the
guarantor is benefited. Both the principal obligation and the guaranty are
extinguished.
2. If the guarantor takes the place of the creditor, the obligation subsists but the
guaranty is extinguished.

What happens if Merger takes place in a Joint Obligation? Only the share of the joint
debtor or the joint creditor, where both the characters of the creditor and debtor meet, will
be extinguished.

What happens if Merger takes place in a Solidary Obligation? The whole obligation is
extinguished. However, the solidary debtor, where both the characters of the debtor and the
creditor meet, is entitled to demand the shares of his co-debtors. In the case of a solidary
creditor, he shall be liable to the shares of his co-creditors.

Compensation

Compensation happens when two parties become debtor and creditor of each other.

Kinds of Compensation

1. As to amount or extent

a. Total the obligations are of the same amounts

b. Partial the obligations are of different amounts

2. As to origin

a. Legal takes place by operation of law even though the debts are payable at different
places and the parties are not aware of the compensation.

1. That each of the parties is principal debtor and principal creditor of each other.
2. That both debts consist in a sum of money or if they are things, they must 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 both debts be liquidated and demandable.
5. That both of them have the free disposal of the things due.

b. Voluntary or Conventional takes place by agreement of the parties.

c. Judicial as ordered by the court.

d. Facultative compensation that may be claimed by one of the parties but not by both.
The following are instances of a facultative compensation:

1. When one of the debts arises from a deposit. A deposit is a contract where a person
receives a thing from another for safe keeping and of returning the same after the
other party has demanded its return. The depositor may claim compensation but
the depositary cannot.
2. When one of the debts arises from commodatum. A commodatum is a contract
whereby a person is given the right to use the property of another but not the
ownership. The lender may claim compensation but the borrower cannot.
3. When one of the debts arises from a claim of support for gratuitous title. The
support referred to here is the future support. The one entitled to receive support
can set up compensation but the one obliged to give cannot.
4. When one of the debts arises from civil liability of a criminal offense. The offended
party can claim compensation but not the offending party.

What if the debts are payable at different places? Legal compensation takes place but
there shall be indemnity for the differences of travel expenses between the two parties.

What if the credit has been assigned? Can the debtor claim compensation against
the assignee?

1. If with his consent he cannot claim compensation unless he has reserved his right.
2. If he was notified but he did not give consent he can claim compensation but only
those obligations due before the assignment.
3. If he was not notified he can claim compensation of all debts maturing before he
has obtained knowledge of the assignment.

Novation

Novation happens when there is a modification in the elements of the obligation. The
original obligation, therefore, is extinguished and replaced by the new obligation.

However, for the Novation to take effect there must be a valid pre-existing obligation. If the
obligation is void, the Novation is also void.

Kinds of Novation

There is a novation wherein there is a change in the prestation or the condition (real or
objective novations). Novations may be express or implied, total or partial. But the most
important kinds of obligations are the ones wherein the debtors and creditors are modified.
These are called Personal Novations.

Kinds of Personal Novations

1. Substitution of the person of the debtor

a. Expromision substitution of the debtor happens without the knowledge or against the
will of the debtor.

b. Delegacion substitution is initiated by the debtor.

Query Expromision Delegacion

What are the rights of The new debtor can only The new debtor can
the new debtor as recover the amount that recover the amount he has
against the old debtor? has been beneficial to the paid and is entitled to
old debtor. He is not
subrogation.
entitled to subrogation.
What if the new debtor The creditor cannot The creditor can demand
is insolvent? demand performance from performance from the old
the old debtor as he is debtor in the following
already released by the cases:
novation.
1. The insolvency already
exists at the time of
novation and is known to
the debtor; or
2. The insolvency already
exists at the time of
novation and is known to
the public.

2. Subrogation of the rights of the creditor to a third person.

Is Novation valid or void in the following cases?

Case Answer

New obligation is void Void

Old obligation is void Void

Old obligation is voidable and has not Valid

been annulled
Old obligation is voidable but has been Void
annulled
The prestation of the old obligation has Void
been lost due to fortuitous event
The prestation of the old obligation has Valid
been lost due to debtors fault