CHAPTER 4: EXTINGUISHMENT OF AN OBLIGATION

Article. 1231: How are Obligations Extinguished?

- Section 1: By payment or performance
Definition(Art. 1232):
It is the full or complete delivery of money or the performance
in any other manner, of an obligation.

Requisites for a valid payment(Art. 1233):

1. The very thing or service contemplated must be paid. 

2. Fulfilment must be complete.


How Payment or performance is made (Art. 1233):
1. If the debt is a monetary obligation, by delivery of the
money. The amount paid must be full, unless of course otherwise
stipulated in the contract. 

2. If the debt is the delivery of a thing or things, by delivery
of the thing or things. 

3. If the debt is the doing of a personal undertaking, by the
performance of said personal undertaking. 

4. If the debt is not doing of something, by refraining from
doing the action.

Right of Creditor to refuse payment by a third person (Art. 1236)

1. If there is no stipulation allowing it.
2. If the third person has no interest in the fulfilment of the
obligation.

Subrogation Defined (Art. 1237):

Subrogation transfers all the rights of the creditor against the
debtor, third persons or guarantors or possessors of mortgages to
the person subrogated.

To whom can payment be made (Art. 1240)

1. To the person in whose favour the obligation has been
constituted.
2. His successor in interest.
3. Any person authorised to receive it. Bb

When will payment to a third person redound to the benefit of the

incapacitated person (Art. 1241)
1. If after the payment, the third person acquires the creditor’s
rights. (Subrogation)
2. If the creditor ratifies the payment to the third person.
(Creditor agrees to the payment to a third person)
3. If by the creditor’s conduct the debtor has been led to
believe that the third person had been authorized to receive the
payment.

What is Dation en Pago (Art. 1245):

It is that mode of extinguishing an obligation whereby the debtor
alienates in favour of the creditor, property for the
satisfaction of a monetary debt.

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When can payment by dation be considered valid (Art. 1245):
1. If the creditor consents, for a sale presupposes the consent
of both parties.
2. If the dation in payment will not prejudice the other
creditors ,for this might lead the debtor to connive with one
creditor in defrauding the other creditors. 

3. If the debtor is not judicially declared insolvent, for here
his property is supposed to be administered by the assignee. 


What is Legal Tender (Art. 1249):

Refers to such currency which may be used for the payment of all
debts, whether public or private. (All notes & coins issued by
the central bank)

Where must payment be made? (Art. 1251):

1. If There is a stipulation — in the place DESIGNATED 

2. If there is no stipulation 

If it is an obligation to deliver a determinate specific
thing - then in the place where the thing might be (usually or
habitually) at the time the obligation was CONSTITUTED. (If
merely temporarily there, as when the object is being shipped or
is already in the ocean, payment should be at the domicile of the
debtor.)
If the obligation to deliver a generic thing, or to give
money, or a personal obligation the delivery must be made at the
domicile of the debtor.

SUBSECTION 1 - APPLICATION OF PAYMENTS

4 Special Forms of Payments:

1. Application of Payment.
2. Dation in Payment
3. Payment by Cession
4. Tender of Payment & Consignation.

Application of Payments Defines (Art. 1252):

It is the designation of the debt to which should be applied a
payment made by a debtor who owes several debts in favour of the
same creditor.

Requisites for Application of Payments (Art. 1252):

1. There must be two or more debts (severalty of debt); 

2. The debts must be of the same kind; 

3. The debts are owed by the same debtor in favor of the same
creditor (thus, there must be only one debtor and only one
creditor); 

4. All the debts must be due (this includes a case when the
benefit of the terms is given to the person making the
application), unless of course the contrary has been stipu-
lated);
5. The payment is not enough to extinguish all the debts.

When Application Must Be Made (Art. 1252):

Application must be made at the time when payment by the debtor
is made, not afterwards.

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SUBSECTION 2: PAYMENT BY CESSION:

What is payment by Cession (Art. 1255):

It is the process by which a debtor transfers all the properties
not subject to execution in favour of his creditors so that the
latter may sell them, and thus apply the proceeds to their
credits.

Essential Requisites of Payment by Cession (Art. 1255):

1. More than one debt; 

2. More than one creditor; 

3. Complete or partial insolvency of debtor; 

4. Abandonment of all debtor’s property not exempt from execution
(unless exemption is validly waived by debtor) in favor of
creditors; 

5. Acceptance or consent on the part of the creditors

SUBSECTION 3: TENDER OF PAYMENT & CONSIGNATION


Tender of Payment Defined:

The act of offering the creditor what is due him together with a
demand that the creditor accept the same.

Consignation Defined:
The act of depositing the thing due with the court or judicial
authorities whenever the creditor cannot accept or refuses to
accept payment. It generally requires a prior tender of payment.

When does consignation take place (Art. 1256):

1. When the creditor is absent or unknown, or does not appear at
the place of payment.
2. When he is incapacitated to receive the payment at the time is
is due.
3. When, without just cause, he refuses to give a receipt.
4. When the title of the obligation has been lost.

Essential Requisite of Consignation (Art. 1257):

1. Existence of a valid debt 

2. Valid prior tender, unless tender is excused 

3. Prior notice of consignation (before deposit) 

4. Actual consignation (deposit) 

5. subsequent notice of consignation 


Effects if Consignation Has Been Duly Made (Art. 1260):

1. The debtor may ask the judge to order the cancellation of the
obligation.
2. The running of interest is suspended. 

3. However, it should be observed that before the creditor
ACCEPTS, or before the judge declares that consignation has been
PROPERLY MADE, the obligation REMAINS. 


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 Effects of Improper Consignation (Art. 1260):
1. If the consignation was improperly made, the obligation
remains, because the consignation is NOT EFFECTIVE as a payment.
2. If at the time of consignation the debt was already due, and
the requisites for consignation are absent, the debtor is in
DEFAULT. 


- By loss of the thing due

When is there a loss:
1. when the object perishes (physically, it is destroyed) 

2. when it goes out of commerce
3. when it disappears in such a way that its existence is unknown
or it cannot be recovered.

- By the Condonation or Remission of the debt.

What is Condonation or remission:
The gratuitous abandonment by the creditor of his right.

Essential Requisites for Remission (Art. 1270):

1. There must be an agreement (since acceptance of the offer is
required).

2. The parties must be capacitated and must consent (there- fore,
it is beyond the power of the courts or of Congress to condone
interest unless the creditor consents).
3. There must be subject matter (object of the remission —
otherwise, there would be nothing to condone). 

4. The cause or consideration must be liberality (for remission is
ESSENTIALLY GRATUITOUS). (Otherwise, the act may be a dation in
payment, or a novation, or a compro- mise.) 

5.  The obligation remitted must have been demandable at the time
of remission (otherwise, the remission is useless).
6. The remission must not be inofficious (otherwise, it would be
reducible, so that the legitimes of the compulsory heirs would not
be impaired). 

7. Formalities of a donation are required in the case of an express
(not implied) remission. (Art. 1270).

- By Confusion or Merger of the rights of the creditor and debtor

Confusion or Merger Defined (Art. 1275):
It is the meeting in one person of the qualities of creditor and
debtor with respect to the same obligation.

Requisites for a Valid Merger (Art. 1275):

1. It should take place between the principal debtor and creditor.
2. The merger must be clear and definite.
3. The very obligation involved must be the same or identical
(because if the debtor acquires certain rights from the creditor
with respect to other things, there is no merger).

What is the effect of Merger on Guarantors (Art. 1276):

Accessory follows the principal” (the guaranty being considered the
accessory obligation); hence, if there is merger with respect to
the principal debt, the guaranty is extinguished

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- By Compensation
What is Compensation (Art. 1278):
It is the extinguishment in the concurrent amount of the
obligations of those persons who are reciprocally debtors and
creditors of each other. 


In order that compensation may be proper (Art. 1279):

1. That each one of the obligors be bound principally, and that he
be at the same time a principal creditor of the other;
2. That both debts consist in a sum of money, or if the things due
are consumable, they be of the same kind, and also of the same
quality if the latter has been stated;
3. That the two debts be due; 

4. That they be liquidated and demandable; 

5. That over neither of them there be any retention or 

controversy, commenced by third persons and communicated in due
time to the debtor.

- By Novation.

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