BM1707

EXTINGUISHMENT OF OBLIGATIONS

Article 1231. Obligations are extinguished:

1. By payment or performance;
2. By the loss of the thing due;
3. By the condonation or remission of debt;
4. By the confusion or merger of the rights of creditor and debtor;
5. By compensation; and/or
6. By novation.

Payment
• It refers to the giving of a thing other than money, the doing of an act, or not doing an act.
• It also refers to payment of damages or penalty in lieu of the fulfillment of an obligation.
• It must be complete for it to produce the extinguishment of the obligation.
Article 1233. As a general rule, the obligation will only be extinguished by payment of it.
Article 1234. Allows for the debtor to recover in case of substantial compliance in good faith. However,
before this exception could apply, the following requisites must first be met:
• There must be substantial performance of the obligation; and
• The obligor must be in good faith.

Article 1235. Principle of estoppel, that is, when the creditor accepts the performance, knowing its
incompleteness and without expressing any protest or objection. Before this exception could apply, the
following requisites must first be met:
• The creditor knows that the performance is incomplete or irregular.
• He accepts the performance without expressing any protest or objection.
Payment should be made by the following persons:
• Debtor
• Any person who has an interest in the obligation (i.e. guarantor)
• A third person who has no interest in the obligation when there is stipulation that he can
make payment
In case the creditor accepts the payment of a third person, one of the following effects shall happen:
1. Payment is made without the knowledge or against the will of the debtor, the payer can recover
from the debtor only insofar as the payment has been beneficial to the latter. Payer can recover
only up to the extent or amount of debt at the time of payment.
2. If payment is made with knowledge of the debtor, the payer acquires the rights of reimbursement
and subrogation. The payer can recover what he has paid and to acquire all the rights of the
creditor.

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Right of subrogation - the payer acquires not only the right to be reimbursed but also all other rights
which the creditor could have exercised pertaining to the credit either against the debtor or against third
person, be they guarantors or possessor of mortgages.

Payment made by a third person who does not intend to be reimbursed by the debtor is generally not
valid. The payment is deemed to be a donation and a donation requires debtor’s consent to be valid.

Free disposal of the thing due - the thing to be delivered must not be subject to any claim or lien or
encumbrance and that “capacity to alienate” means that the person is not incapacitated to enter into
contracts and for that matter, to make a disposition of the thing due.

Article 1427. The creditor cannot be compelled to accept payment where the person paying has no
capacity to make it.

Payment shall be made to the following persons:

• the creditor or obligee (person in whose favor obligation has been constituted)
• his successor in interest
• any person authorized to receive it (Article 1240).

Any person authorized to receive it - it does not only refer to those authorized by the creditor but also to
those authorized by law to receive the payment, such as a guardian, executor or administrator of the
estate of the deceased, and assignee or liquidator of a partnership or corporation as well as any other
person who may be authorized to do so by law.

Article 1242. Payment in good faith made to any person in possession of the credit shall be valid.

Article 1243. When a debtor has been judicially ordered to retain the debt but the debtor still paid the
same to the creditor, such payment shall not be valid.

Forms of special payment:

1. Dation in payment (adjudication or dacion en pago) - the conveyance of ownership of a thing as

an accepted equivalent of performance. In simple terms, an existing debt in money is satisfied not
by payment of money but by the alienation of property. However, this is only possible if agreed
to by the creditor.

2. Application of payment - the designation of the debt to which should be applied the payment
made by a debtor who has various debts of the same kind in favor of one and the same creditor.
In order for application of payments to be available, the following requisites must be present:
• There must be one debtor and one creditor.
• There must be two (2) or more debts.
• Debts must be of the same kind.
• The debts to which payment made by the debtor has been applied must be due.
• Payment made must not be sufficient to cover all the debts.

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Rules in applying payments

1. As indicated by the debtor in his own choosing, the debtor must indicate at the time of making
payment and not afterwards, which particular debt is being paid.
2. As assigned by the creditor in the absence of the application of payment by the debtor by
specifying in the receipt which debt has been paid.
3. To the most onerous amount.
4. If debts due are of the same nature and burden, the payment shall be applied to all of them
proportionately.

Application of payments may only be made to debts that are due

1. Payment by cession - the assignment or the abandonment of all the properties of the
debtor for the benefit of his creditors in order that the proceeds thereof satisfy their
credits.

2. Tender of payment and consignation - debtor’s act of offering to the creditor the thing or
amount due. It is merely a preliminary process for legal payment to be made. It must be
accompanied with consignation to produce legal payment. For a tender of payment to be
valid, the following requisites must be met:
a. Tender of payment must comply with the rules on payment or with the terms
require by the contract in making such tender.
b. It must be unconditional and for the whole amount due and in legal tender.
c. It must be actually made.

Requisites to make a proper consignation

1. A valid debt which is due must exist.
2. The debtor made a tender of payment but the creditor refused without justifiable reason
to accept it.
3. A previous notice of consignation to persons interested in the fulfillment of obligation
must be made.
4. The consignation of the thing or sum due is made.
5. A subsequent notice of consignation to interested parties is made.

Loss of the Thing Due

The law technically defines a thing is lost when it perishes, or goes out of commerce or disappears in such
a way that its existence is unknown or it cannot be recovered. For loss of the thing due to extinguish an
obligation, the following requisites must be complied with:
• The obligation is to deliver a specific or determinate thing;
• The loss of the thing occurs without the fault of the debtor; and
• The debtor is not guilty of delay.

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Cases when the loss of the thing due will not extinguish the obligation even without fault and
delay on the part of the debtor:
1. When the law so provides
2. When the stipulation so provides
3. When the nature of the obligation requires the assumption of risk
4. When the obligation to deliver a specific thing arises from a crime

Impossibility of performance of obligations can either be physical or legal impossibility.

• Physical impossibility - arises, in purely personal obligations when the personal
obligations of the obligor are involved, when the obligor dies or becomes physically
incapacitated to perform the obligation.
• Legal impossibility - occurs when the obligation cannot be performed due to a provision
of law that renders the obligation impossible.

Condonation or Remission
This is the gratuitous abandonment by the creditor of his right against the debtor. It requires the following:
• It must be gratuitous.
• It must be accepted by the debtor.
• The parties have capacity.
• It must not be inofficious.
• If made expressly, it must comply with the forms of donations.

Kinds of Condonation or Remission:

1. as to its extent:
a. complete, when it covers the entire obligation
b. partial, when it does not cover the entire obligation.
2. as to its form:
a. express, when it is made verbally or in writing
b. implied, when it can only be inferred from conduct

3. as to its date of effectivity:

a. inter vivos, when it will take effect during the lifetime of the donor
b. mortis causa, when it will become effective upon the death of the donor

Confusion or Merger of Rights

This is another cause of extinguishment of obligation where there is a meeting in one person of the
qualities of creditor and debtor with respect to the same obligation.
The law sets this as a mode of extinguishing an obligation to obliterate the absurdity produced by the
situation wherein a debtor is his own creditor. But the following requisites must be present for a valid
confusion or merger to take place:
• It must take place between the principal debtor and creditor.

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• It must be complete.
• Confusion does not extinguish a joint obligation except only insofar as the share belonging
to the debtor or creditor whom the characters concur is concerned because it is not
complete.

Compensation
This takes place when two (2) persons, in their own right, are creditors and debtors of each other.

In order for compensation to take place, the following requisites must be met:
1. The parties are principal creditors and principal debtors of each other.
2. The 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. The two (2) debts are due.
4. The debts are liquidated and demandable.
5. There is no retention or controversy, over them, commenced by third persons and communicated
in due time to the debtor.

Confusion vs. Compensation

Confusion Compensation
There are two (2) or more persons
There is only one (1) person who is a
involved, each of whom is a debtor and
creditor and debtor of himself.
creditor of the other.
There is only one (1) obligation. There are two (2) obligations.
There is impossibility of payment. There is indirect payment.

Kinds of Compensation
1. According to its effect or extent, compensation may either be:
a. Total when both obligations are of the same amount and are entirely extinguished; or
b. Partial when the two obligations are of different amounts and a balance remains.
2. According to its cause or origin, compensation may either be:
a. Legal when it takes place by operation of law;
b. Voluntary when it takes place by agreement of the parties;
c. Juridical when it takes place by order from a court in a litigation; or
d. Facultative when it can be set up only by one of the parties.

Novation
The total or partial extinction of an obligation through the creation of a new one which substitutes it.
There can be novation through changing the object or principal conditions, through substituting the
person of the debtor; or subrogating a third person in the rights of the creditor.
Requisites that must concur in order for novation to take place:
1. There must be a valid previous obligation.

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2. There must be capacity or intention on the part of the parties to modify or extinguish an
obligation.
3. The previous obligation must be modified or extinguished.
4. A new valid obligation must be created.

Kinds of Novation
1. According to origin, they can either be:
a. Legal when they take place by operation of law; or
b. Conventional when they take place by agreement of the parties.
2. According to how it is constituted, they can either be:
a. Express when it is so declared in unequivocal terms; or
b. Implied when the old and new obligations are essentially incompatible.
3. According to extent or effect, they may either be:
a. Total or extinctive when the old obligation is completely extinguished; or
b. Partial or modificatory when the old obligation is merely modified
4. According to the subject, they may either be:
a. Real or objective when the object or cause or principal conditions of the obligations are
changed;
b. Personal or subjective when the person of the debtor is substituted and/or when third
person is subrogated in the rights of the creditor; or

i. Personal novation may be in the form of substitution when the person of the
debtor is substituted which may be:

a. Expromision or that which take place when a third person of his own
initiative and without knowledge or against the will of the original debtor
assumes the latter’s obligation with the consent of the creditor; or

b. Delegacion or that which takes place when the creditor accepts a third
person to take the place of the debtor at the instance of the latter.

The difference lies in who between the third person and the original debtor
took the initiative. If it’s the third person, it’s called expromision while if it is
the original debtor himself, it’s called delegacion.

ii. Personal novation may also be in the form of subrogation when a third person is
subrogated in the rights of the creditor.

a. Mixed when the object and/or principal conditions of the obligation and
the debtor or the creditor, or both of the parties, are changed. Simply, it
is a combination of real and personal novations.

Other causes of extinguishment of obligations

1. Death of a party in case of an obligation requiring personal service and impossibility of fulfillment
2. Mutual desistance or withdrawal

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3. Fulfillment of resolutory condition

4. Compromise
5. Happening of a fortuitous event
6. Prescription

REFERENCES
Civil Code of the Philippines

De Leon, H. & De Leon Jr., H. (2014). The Law on obligations and contracts. Philippines: Mason:Rex Book
Store.

Paras, E. (2016). Civil code of the Philippines annotated prescription; Obligations and contracts article
1106-1457. Philippines: Rex Book Store.

Pineda, E. (2009). Obligations and contracts. Philippines: Central Book Supply, Inc.

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