OBLIGATIONS

ARAC, MONTECILLO, NACURITA, RAYMUNDO

ART. 1231. Obligations are extinguished:
(1) By payment or performance;
(2) By the loss of the thing due; debt;
(3) By the condonation or remission of the
(4) By the confusion or merger of the rights of creditor
and debtor;
(5) By compensation;
(6) By novation.

Other causes of extinguishment of obligations, such as

annulment, rescission, fulfillment of a resolutory
condition, and prescription, are governed elsewhere in
this Code. (1156a)
CAUSES OF EXTINGUISHMENT OF OBLIGATIONS.

In addition to those enumerated in Article 1231, other causes are:

(1) Death of a party in case of an obligation requiring personal service (par. 1,

Art. 1311.);
(2) Mutual desistance or withdrawal.
(3) Arrival of resolutory period (par. 2, Art. 1193,,);
(4) Compromise (Art. 2028.);
(5) Impossibility of fulfillment (Art. 1266); and
(6) Happening of a fortuitous event. (Art. 1174.)
These causes as well as those enumerated in the second paragraph of Article
1231 are governed under other chapters of the Civil Code.
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. (n)
Payment may consist of not only in the delivery of money but also the giving of a thing
(other than money), the doing of an act, or not doing of an act.
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. (1157)
A debt may refer to an obligation to deliver money, to deliver
a thing (other than money), tò do an act, or not to do an act.

(1) Integrity of prestation. — A debt to deliver a thing (including money) or

to render service is not understood to have been paid unless the thing or
service has been completely delivered or rendered, as the case may be.
Partial or irregular performance will not produce the extinguishment of an
obligation as a general rule.

(2) Identity of the prestation. - This second requisite means that the very
prestation due must be delivered or performed. (see Art. 1244.)

Article 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.
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. (n)
Article 1234 is the first exception to the rule laid down in Article 1233.

The requisites are:

(1) There must be substantial performance; and
(2) The obligor must be in good faith.

EXAMPLE:
S obliged himself to deliver 500 bags of cement to
B for a certain price. However, despite diligent
efforts on his part, S was able to deliver only 450
bags because of the cement shortage. Take note
that S wants to comply with his obligation to deliver
the entire 500 bags but he could not do so for
reasons beyond his control.

Under Article 1234, S can recover as though there

had been complete delivery less the price of the 50
bags. S must show, however, that he attempted in
good faith to comply with his obligation.
 ART. 1235. When the obligee accepts the performance, knowing its
incompleteness or irregularity, the obligation seems fully complied with.
Recovery allowed when incomplete or irregular performance is waived.
The above provision is the other exception to Article 1233. It is founded on the principle of estoppel.
(1) If the payment is incomplete or irregular, the creditor may properly reject it.
(2) In case of acceptance, the law considers that he waives his right. The whole obligation is
extinguished.

The requisites are:

(1) The obligee knows that the performance is incomplete or irregular; and
(2) He accepts the performance without expressing any protest or objection.

EXAMPLE:
X agreed to paint the house of Y. According to their stipulation, X would use a particular brand of
paint. If Y accepted the performance of X, knowing that the paint used was another brand and
without expressing any protest or objection, the obligation is deemed fully complied with.
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)
The creditor is bound to accept payment or performance from the following:
(1) The debtor;
(2) Any person who has an interest in the obligation (like a guarantor); or
(3) A third person who has no interest in the obligation when there is stipulation that he can make payment. (par. 1.)
Creditor may refuse payment by a third person.
EFFECT OF PAYMENT BY A THIRD PERSON.

The second paragraph of Article 1236 recognizes that payment

or performance may be made by any person not incapacitated,
even without the knowledge or against the will of the debtor, and
although he has absolutely no interest in the obligation.

(1) If 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. (par. 2.) In other
words, the recovery is only up to the extent or amount of the debt
at the time of payment.

(2) If made with the knowledge of the debtor. - The payer

shall have the rights of reimbursement and subrogation, that
is, to recover what he has paid (not necessarily the amount of
the debt) and to acquire all the rights of the creditor. (par. 2,
Arts.1236; 1237, 1302, 1303.)
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. (1159a)
Right of third person to subrogation.
Whoever pays on behalf of the debtor is entitled to subrogation (see Art 1300.) if the payment is with the
consent of the latter. (Arts. 1237, 1302[2].) If the payment is without the knowledge or against the will of the
debtor, the third person cannot compel the creditor to subrogate him in the latter's accessory rights of
mortgage, guaranty, or penalty.

Subrogation and reimbursement are distinguished.

(1) In subrogation, the person who pays for the debtor is put into the shoes of
the creditor. The payor acquires not only the right to be reimbursed for he has
paid but also all other rights which the creditor could have exercised pertaining
to the credit either against the debtor or against third persons, be they
guarantors or possessor of mortgages. (Art. 1303.)

(2) In reimbursement, the third person entitled by reason of payment has

merely the bare right to be refunded to the extent provided in the second
paragraph of Article 1236 without the right to the guarantees and securities of
the original obligation. In subrogation, however, there is no real extinction of the
obligation, but only a change of creditor.
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. (n)

Payment by a third person who does not intend to be reimbursed.

Article 1238 "embodies the idea that no one should be. compelled to accept the generosity of another."
(Report of the Code Commission, p. 132.) If the paying third person does not intend to be reimbursed, the
payment is deemed donation which requires the debtor’s consent to be valid.
However, if the creditor accepts the payment, it shall be valid as to him and the payor although the
debtor did not give his consent to the donation.

EXAMPLE:
D owes C P10,000, without the intention of being reimbursed, S pays D’s obligation. D had previously
accepted S’s generosity payment,

In this case D is not liable to S and his obligation is to extinguish. But if D did not consent to the donation,
S may recover from D since there has been no donation, although originally S did not intend to be
reimbursed. Nevertheless, the obligation of D to C is extinguished because the payment is valid as to C
who has accepted it.
 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." (1160a)

Meaning of "free disposal of thing due" and "capacity to alienate."

(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 (e.g., mortgage, pledge) of a third person.
(2) Capacity to alienate means that the person is not incapacitated to enter into contracts
(Arts. 1327, 1329.) and for that matter, to make a disposition of the thing due.

As a general rule, in obligations to give, payment by one who does not have the free disposition of the
thing due and can be recovered.
The exception is provided in Article 1427. The creditor cannot be compelled to accept payment where the
person paying has no capacity to make it.
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. (1162a)

Payment shall be made to:

(1) the creditor or obligee (person in whose favor obligation has been
constituted);
(2) his successor in interest (like an heir or assignee); or
(3) any person authorized to receive it.

The creditor referred to must be the creditor at the time the payment
is to be made, not at the constitution of the obligation.
Hence, if a person is subrogated to the right of the creditor, payment
should be made to the new creditor.
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.
(1163a)
Effect of payment to an incapacitated person.

Payment to a person incapacitated to administer or manage his property is

not valid unless such incapacitated person kept the thing paid or delivered
(so that it is not necessary that it should have been invested in some
profitable venture), or was benefited by the payment.
In the absence of this benefit, the debtor may be made to pay again by the
creditor's guardian or by the incapacitated person himself when he
acquires or recovers his capacity. Proof of such benefit is incumbent upon
the debtor who paid.
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. (n)

Payment by a third person who does not intend to be reimbursed.

Article 1238 "embodies the idea that no one should be. compelled to accept the generosity of another."
(Report of the Code Commission, p. 132.) If the paying third person does not intend to be reimbursed, the
payment is deemed donation which requires the debtor’s consent to be valid.
However, if the creditor accepts the payment, it shall be valid as to him and the payor although the
debtor did not give his consent to the donation.

EXAMPLE:
D owes C P10,000, without the intention of being reimbursed, S pays D’s obligation. D had previously
accepted S’s generosity payment,

In this case D is not liable to S and his obligation is to extinguish. But if D did not consent to the donation,
S may recover from D since there has been no donation, although originally S did not intend to be
reimbursed. Nevertheless, the obligation of D to C is extinguished because the payment is valid as to C
who has accepted it.
 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." (1160a)

Meaning of "free disposal of thing due" and "capacity to alienate."

(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 (e.g., mortgage, pledge) of a third person.
(2) Capacity to alienate means that the person is not incapacitated to enter into contracts
(Arts. 1327, 1329.) and for that matter, to make a disposition of the thing due.

As a general rule, in obligations to give, payment by one who does not have the free disposition of the
thing due and can be recovered.
The exception is provided in Article 1427. The creditor cannot be compelled to accept payment where the
person paying has no capacity to make it.
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. (1162a)

Payment shall be made to:

(1) the creditor or obligee (person in whose favor obligation has been
constituted);
(2) his successor in interest (like an heir or assignee); or
(3) any person authorized to receive it.

The creditor referred to must be the creditor at the time the payment
is to be made, not at the constitution of the obligation.
Hence, if a person is subrogated to the right of the creditor, payment
should be made to the new creditor.
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.
(1163a)
Effect of payment to an incapacitated person.

Payment to a person incapacitated to administer or manage his property is

not valid unless such incapacitated person kept the thing paid or delivered
(so that it is not necessary that it should have been invested in some
profitable venture), or was benefited by the payment.
In the absence of this benefit, the debtor may be made to pay again by the
creditor's guardian or by the incapacitated person himself when he
acquires or recovers his capacity. Proof of such benefit is incumbent upon
the debtor who paid.
Effect of payment to a third person.
Payment to a third person or wrong party is not valid except insofar as it has redounded to the benefit of the
creditor.
That the creditor was benefited by the payment made by the debtor to a third person is not presumed and
must, therefore, be satisfactorily established by the person interested in proving this fact. In the absence of
such proof, the payment thereof in error and with good faith will not deprive the creditor to his right to
demand payment.

When benefit to creditor need not be proved by debtor.

in case of:
But the debtor is relieved from proving benefit to the creditor
(I) subrogation of the payer in the creditor's rights;
(2) ratification by the creditor; or (3)
estoppel on the part of the creditor. (par. 2.)
In such cases, the benefit to the creditor is to be presumed.
Through estoppel, an admission or representation is rendered conclusive upon the person making it and
cannot be denied or disproved as against the person relying thereon. (Art. 1431.)
ART. 1242. Payment made in good faith to any person in possession of the credit shall
release the debtor. (1164)
Payment to third person in possession of credit.
This article gives another instance when there is valid payment to a third person.
It must be observed that the "possession" referred to under the above provision is possession of the credit
itself and not merely of the document or instrument evidencing the credit.
Hence, mere possession of the instrument (unless transferable by delivery) does not entitle the holder to
payment nor does payment release the debtor. Furthermore, the payer must act in good faith, that is, in the
honest belief that he is making a valid payment and that the payee is the owner of the credit. Good faith is
presumed.
 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. (1165)

When payment to creditor not valid.

In an action against the debtor who is the creditor of another, the
latter (the debtor-stranger), during the pendency of the case, may be
ordered by the court (or by any competent authority though it be
administrative) to retain the debt until the right of the plaintiff, the
creditor in the main litigation is resolved.
Payment made subsequently by the debtor-stranger shall not be valid
if the plaintiff wins the case and cannot collect from the debtor to
whom the payment is made. Such payment is considered as made in
bad faith.
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. (1166a)
Very prestation due must be complied with.
(1) The first paragraph refers to a real obligation to deliver a specific thing. A thing different from
that due cannot be offered or demanded against the will of the creditor or debtor, as the case may be.
(2) The second paragraph refers to personal (positive and negative) obligations. The act to be
performed or the act prohibited cannot be substituted against the obligee's will. (seeArt. 1167.)

EXAMPLE:
D obliged himself to deliver to C a specific horse. D cannot require C to
accept another horse although it commands a higher price; neither can C
require D to deliver another horse belonging to D although it can be sold
only at a much lower price.

When prestation may be substituted.

Of course, substitution can be made if the obligee consents.
In facultative obligations, the debtor is given the right to render another
prestation in substitution. (Art. 1206.)
Article 1244 will not also apply in case of waiver by the creditor or
substitution is allowed by stipulation with the consent of the creditor. (see
Arts. 1245, 1291[1].)
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. (n)

Special forms of payment.

There are four (4) special forms of payment under the Civil Code, namely:
(1) dation in payment (Art. 1245.);
(2) application of payments (Art. 1253.);
(3) payment by cession (Art. 1255.);
(4) tender of payment and consignation. (Arts.1256-1261.)
Strictly speaking, application of payments is not a special form of payment.

Dation in payment (adjudication or dacion en pago) is the conveyance of ownership of a thing as an accepted
equivalent of performance.
An existing debt in money is satisfied, not by payment of money (Art. 1241.) but by the alienation of property.
The law of sales governs because dation in payment may be considered a specie of sale in which the amount of
the money debt becomes the price of the thing alienated. (see Art. 1619.)
EXAMPLE:
D owes C P30,000. To fulfill the obligation, D with the consent of C, delivers a piano. If the piano, however, is worth less than
P30,000, the conveyance must be deemed to extinguish the obligation to the extent only of the value agreed upon unless the
parties by their agreement have considered the piano as full payment, in which case, the obligation is totally extinguished.
ART. 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. (1167a)

Rule of the medium quality.

If the obligation consists in the delivery of a specific thing, the very thing due must be delivered. (Art.
1244.) However, if the obligation is to deliver a generic thing, the purpose of the obligation and other
circumstances shall be taken into consideration to determine the quality or kind of thing to be delivered.
Article 1246 is a principle of equity in that it supplies justice in cases where there is lack of precise
declaration in the obligation.
 ART. 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. (1168а)
Debtor pays for extrajudicial expenses.
The extrajudicial expenses of payment are for the account of the debtor.
The reason is that the obligation is extinguished when payment is made
and it is, therefore, the debtor who is primarily benefited.
If the parties have made a stipulation as to who will bear the expenses,
then their stipulation shall be followed.

Losing party generally pays judicial costs.

Judicial costs are the statutory amounts allowed to the party to an action
for his expenses incurred in the action. Under the Rules of Court (Sec. 1,
Rule 142.), the costs of an action shall, as a rule, be paid by the losing
party. The court may, however, for special reasons, adjudge that either
party shall pay the costs or that the same be divided as may be
equitable.
No costs are allowed against the Government, unless otherwise
provided by law.
ART. 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. (1169a)
The above provision contemplates obligations where there is only one creditor
and only one debtor. Joint and solidary obligations are governed by Articles
1207 to 1222. In order that payment may extinguish an obligation, it is
necessary that there be complete performance of the prestation.
(Art. 1233.) The creditor may accept but he cannot be compelled to accept
partial performance. The debtor has the duty to comply with the whole of the
obligation but he cannot be required to make partial payments if he does not
wish to do so.

There are cases, however, when partial performance may be either required or
insisted. Among these cases are:
(1) when there is an express stipulation to that effect
(2) when the debt is in part liquidated (definitely and determined or computed)
and in part unliquidated (par. 2.); and
(3) when the different prestations in which the obligation consists are subject to
different terms or conditions which affect some of them.
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.
The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents
shall produce the effect of payment one when they hasteroy hue. bren in through.
In the meantime, the action derived from the original obligation shall be held in abeyance. (1170)
Legal tender is that currency which if offered by the debtor in the right amount, the creditor must accept in payment of
a debt in money.
Debts in money shall be paid in the currency stipulated. If it is not possible to deliver such currency or in the absence
of any stipulation to make payment in a foreign currency, then the payment shall be made in the currency which is
legal tender in the Philippines.
Payment by means of instruments of credits.
(1) Right of creditor to refuse or accept. - Promissory notes, checks, bills of exchange and other commercial documents
are not legal tender and, therefore, the creditor cannot be compelled to accept them. This is true even though the check is
certified (see Negotiable instruments Law [Act No. 20311, Sec. 189., or is
(a) The creditor, however, if he chooses, may accept them, without the acceptance producing the effect of obligation is
suspended payment. In the meantime, the demandability of the original
(b) The creditor must cash the instrument, and it is only when it is dishonored that he can bring an action for non-payment
of the debt. (par. 3.)
(2) Effect on obligation. - Payment by means of mercantile documents does not extinguish the obligation:
(a) until they have been cashed;
(b) unless they have been impaired through the fault of the creditor. (par. 2.)
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 valve in the contrary. (n)

(1) Inflation is a sharp sudden increase of money or credit or both without a corresponding increase in
business transactions.(Webster's Dictionary.) Inflation causes a drop in the value of money, resulting in the
rise of the general price level.
2) Deflation is the reduction in volume and circulation of the available money or credit, resulting in a decline
of the general price level; it is the opposite of inflation.
Basis of payment in case of extraordinary
inflation or deflation.

Under Article 1250, the purchasing value of the currency at the time of the establishment of the obligation
shall be the basis of payment, in case of any extraordinary increase or decrease in the purchasing power of
the currency which the parties could not have reasonably foreseen. This is, however, subject to the
agreement of the parties to the contrary.
EXAMPLE:
D borrowed from C P5,000 payable after five years. On the maturity of the obligation, the value of P5,000
dropped to P2,500 because of inflation (or increased to P10,000 because of deflation).
 ART. 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. (1168а)
Debtor pays for extrajudicial expenses.
The extrajudicial expenses of payment are for the account of the debtor.
The reason is that the obligation is extinguished when payment is made
and it is, therefore, the debtor who is primarily benefited.
If the parties have made a stipulation as to who will bear the expenses,
then their stipulation shall be followed.

Losing party generally pays judicial costs.

Judicial costs are the statutory amounts allowed to the party to an action
for his expenses incurred in the action. Under the Rules of Court (Sec. 1,
Rule 142.), the costs of an action shall, as a rule, be paid by the losing
party. The court may, however, for special reasons, adjudge that either
party shall pay the costs or that the same be divided as may be
equitable.
No costs are allowed against the Government, unless otherwise
provided by law.
ART. 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. (1169a)
The above provision contemplates obligations where there is only one creditor
and only one debtor. Joint and solidary obligations are governed by Articles
1207 to 1222. In order that payment may extinguish an obligation, it is
necessary that there be complete performance of the prestation.
(Art. 1233.) The creditor may accept but he cannot be compelled to accept
partial performance. The debtor has the duty to comply with the whole of the
obligation but he cannot be required to make partial payments if he does not
wish to do so.

There are cases, however, when partial performance may be either required or
insisted. Among these cases are:
(1) when there is an express stipulation to that effect
(2) when the debt is in part liquidated (definitely and determined or computed)
and in part unliquidated (par. 2.); and
(3) when the different prestations in which the obligation consists are subject to
different terms or conditions which affect some of them.
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.
The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents
shall produce the effect of payment one when they hasteroy hue. bren in through.
In the meantime, the action derived from the original obligation shall be held in abeyance. (1170)
Legal tender is that currency which if offered by the debtor in the right amount, the creditor must accept in payment of
a debt in money.
Debts in money shall be paid in the currency stipulated. If it is not possible to deliver such currency or in the absence
of any stipulation to make payment in a foreign currency, then the payment shall be made in the currency which is
legal tender in the Philippines.
Payment by means of instruments of credits.
(1) Right of creditor to refuse or accept. - Promissory notes, checks, bills of exchange and other commercial documents
are not legal tender and, therefore, the creditor cannot be compelled to accept them. This is true even though the check is
certified (see Negotiable instruments Law [Act No. 20311, Sec. 189., or is
(a) The creditor, however, if he chooses, may accept them, without the acceptance producing the effect of obligation is
suspended payment. In the meantime, the demandability of the original
(b) The creditor must cash the instrument, and it is only when it is dishonored that he can bring an action for non-payment
of the debt. (par. 3.)
(2) Effect on obligation. - Payment by means of mercantile documents does not extinguish the obligation:
(a) until they have been cashed;
(b) unless they have been impaired through the fault of the creditor. (par. 2.)
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 valve in the contrary. (n)

(1) Inflation is a sharp sudden increase of money or credit or both without a corresponding increase in
business transactions.(Webster's Dictionary.) Inflation causes a drop in the value of money, resulting in the
rise of the general price level.
2) Deflation is the reduction in volume and circulation of the available money or credit, resulting in a decline
of the general price level; it is the opposite of inflation.
Basis of payment in case of extraordinary
inflation or deflation.

Under Article 1250, the purchasing value of the currency at the time of the establishment of the obligation
shall be the basis of payment, in case of any extraordinary increase or decrease in the purchasing power of
the currency which the parties could not have reasonably foreseen. This is, however, subject to the
agreement of the parties to the contrary.
EXAMPLE:
D borrowed from C P5,000 payable after five years. On the maturity of the obligation, the value of P5,000
dropped to P2,500 because of inflation (or increased to P10,000 because of deflation).
ART. 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. (1171a)
Article 1251 gives the rules regarding the place for the payment of an
obligation without prejudice to venue under the Rules of Court.
(1) If there is a stipulation, the payment shall be made in the place designated.
(par. 1, see Art. 1306.)
(2) If there is a stipulation and the thing to be delivered is specific, the payment
shall be made at the place where the thing was, at the perfection of the
contract. (par. 2.)
(3) If there is no stipulation and the thing to be delivered is generic, the place
of payment shall be the domicile of the debtor. (par. 3.) In this case, the
creditor bears the expenses in going to the debtor's place to accept payment
(see Art. 1247.) subject to the rule in paragraph five.
SUBSECTION 1. — Application of Payments

ART. 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. (1172a)
Requisites of application of payments.
The requisites are:
(1) There must be one (1) debtor and one (1) creditor;
(2) There must be two (2) or more debts;
(3) The debts must be of the same kind;
been applied must be due; and
(4) The debts to which payment made by the debtor has the debts.
(5) The payment made must not be sufficient to cover all the debts
Application as to debts not yet due.
The application of payments as to debts not yet due cannot be made unless:
(1) there is a stipulation that the debtor may so apply; or
(2) it is made by the debtor or creditor, as the case may be, for whose benefit the period has been constituted.
(see Art. 1196; also Art. 1792.)
Rules on application of payments.

A debtor who has several different debts may make part payment. As to which debt is paid, the rules
are as follows:
(1) The debtor has the first choice; he must indicate at the time of making payment, and not
afterwards, which particular debt is being paid. If, in making use of his right, the debtor applied the
payment to a debt, he cannot later claim that it should be applied to another debt.
(2) The right to make the application once exercised is irrevocable unless the creditor consents to the
change;
(3) If the debtor does not apply payment, the creditor may make the designation by specifying in the
receipt which debt is being paid;
(4) If the creditor has not also made the application, or if the application is not valid (par. 2.), the debt,
which is most onerous to the debtor among those due, shall be deemed to have. been satisfied (par.
1, Art. 1254); and
(5) If the debts due are of the same nature and burden, the payment shall be applied to all of them
proportionately.
ART. 1253. If the debt produces interest, payment of the principal shall not be deemed to
have been made until the interests have been covered. (1173)

Interest earned paid ahead of principal.

(1) Rule in Article 1253 mandatory. - The rule laid down in the article is mandatory. Hence, the debtor cannot
choose to credit his payment to the principal before the interest is paid.
The payment must be applied first to the interest and whatever balance is left can be credited to the principal.
The creditor can refuse an application of the debtor made contrary to the provision of Article 1253. (see Art.
1176.):
(2) Rule subject to agreement or waiver. — The rule is subject, however, to any agreement between the
parties, or to waiver by the creditor. In this sense, Article 1253 is merely a directory.

EXAMPLE:
P10,000.D owes C P10,000 with P1,000 as accrued interest. D pays C
The P10,000 will first be applied to the interest earned by the debt. Then the balance of P9,000 will be credited
to the amount.
Therefore, D will still owe C P1,000 of the principal.