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Modes of Extinguishing

an Obligation

Business Law I. Atty. Ida Marie Vega Escolano

New Era University. College of Business Administration.

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Modes of extinguishing an obligation1. Payment or performance

2. Loss of the thing due

3. Condonation or remission

4. Confusion or merger

.

6. Novation (Art. 1231, CC)

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PAYMENT Consists in the delivery of a sum of money or a thing, or

doing a thing, or not doing something. (Art. 1232, CC)

Compliance of an obligation to give, to do or not to do.

It does not only mean fulfillment of monetary obligation.

It embraces all kinds of performance or compliance,

regardless of the manner, whether real or personalobligations.

TRUE OR FALSE.The seller of the car may make payment to the buyer.

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Complete payment GR: Payment must be complete to extinguish ones

obligation. (Art. 1233, CC)

EXC:

1. When there is substantial compliance in good faith.

(Art. 1234)

2. CR accepts incomplete payment (Art. 1235)

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Payment by third persons (Art. 1236) GR: CR cannot be compelled to accept payment by a

third person (=discretionary)

EXC:

1. When there is a stipulation to the contrary

2. When it is made b a 3rd erson who has an interest

in the fulfillment of the obligation.

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Payment by third persons (Art. 1236)

Accepted by theCR

If payment is infull, obligation isextinguished.

Payment by a 3rd

person

ee rig ts o a3rd person payor

Rejected by CR

Obligation is

subsisting

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Rights of third person payor (Art. 1236-8)

Rights of 3rd

Payment with

the consent ofDR

He can ask forfull

reimbursement

Rights ofSubrogation

person payor

Payment W/Othe consent of

DR

BeneficialReimbursement

No right ofsubrogation

*No intention tobe reimbursed =

DONATION

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Payment to third person (Art. 1241) GR: Payment to a third person is not valid.

EXC:

1. When the 3rd person is authorized to receive it.

2. When the payment to the 3rd person has redounded

to the benefit of the CR

3. When the 3rd person is in possession of the credit andpayment was in good faith.

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Special Modes of Payment1. Application of payment

2. Cession of payment or assignment

3. Dation in Payment

4. Tender of payment AND consignation

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Application of payment (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 favor of the same creditor. PURPOSE: to know which debt out of the two or more

debts owing the CR should be extinguished.

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Application of payment (Art. 1252) REQUISITES:

1. Two or more debts

2. Of the same kind

3. One debtor and one creditor

.

5. Tendered payment is not sufficient to extinguish all

obligations.

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Interest first before principal (Art. 1253) In the payment of an obligation producing interest, when

the amount being paid is not sufficient to cover the

principal and interest due, the amount paid must applyfirst to the interest, the excess if owing, shall be applied to

the principal obligation.

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Summary of rules in application of payment

(Art. 1252,54)1. DR has to choose which obligation he wishes to

extinguish

2. If DR does not apply payment, CR may make thedesignation by stating in the receipt

3. If No.1 and 2 will not apply, the most onerous to the

DR among those due must be paid4. If the debts due are of the same nature and burden,

apply to all of them proportionately.

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Cession in payment (Art. 1255) The process by which a DR transfers all the properties

not subject to execution in favor of his CRs so that the

latter acquires the right to sell them and apply theproceeds to their individual credit pro rata.

REQUISITES

1. More the one debt2. More than one CR

3. Complete or partial insolvency of the DR

4. Abandonment of all DRs properties not exempt fromexecution.

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Effects of Cession in payment1. CR do not become the owners, they are considered

assignees with power to sell the property

2. DR is released from the obligation to the extent of thenet proceeds of the sale.

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Dation in payment (Art. 1245) Also called Dacion en pago, payment in kind

Is the mode of extinguishing an obligation whereby the

DR alienates property in favor of the CR for a satisfactionof monetary obligation.

Obligation is money, the payment is property

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Dation vs. SaleDATION SALE

There is a pre-existing credit

NO pre-existingcredit

extinguished

obligation

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Dation vs. CessionDATION CESSION

Does not affect all

properties

Generally affects all

properties

No plurality of creditors Plurality of creditors

ay a e p ace ur ng e

solvency of the DR

equ res u or par a

insolvency

Transfers ownership upon

delivery

Does not transfer

ownership

An act of novation Not an act of novation

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Tender of Payment (Art. 1256) The act, on the part of the DR, of offering to the CR the

thing due or amount due.

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Consignation (Art. 1258) The act of depositing the thing or amount due with the

proper court when the CR does not desire or cannot

receive it, after complying with the formalities required bylaw.

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Tender of Payment vs. ConsignationTENDER OF PAYMENT CONSIGNATION

Antecedent act, the

prepatory act to extinguishthe obligation

Principal act, which will

produce the effects ofpayment

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Requisites of a valid consignation1. Existence of a valid debt which is due

2. Tender of payment AND unjustifiable refusal by the CR

to accept it3. Previous notice of consignation

4. Consi nation

5. Subsequent notice of consignation

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TENDER OF

ACCEPTEDObligation isextinguished

PAYMENT

REJECTED

JUSTIFIEDREFUSAL Can NOT consign

UNJUSTIFIEDREFUSAL

CONSIGNATIONIS PROPER

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Cases of JUSTIFIED REFUSAL1. Art. 1236, Payment by a third person not interested in

the fulfillment of the obligation

2. Art. 1244 Payment of a different prestation3. Art. 1243 Payment is partial

4. Art. 1249 Pa ment is not in le al tender

5. Payment is premature

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Immediate consignation (Art. 1256) GR: Tender of payment must precede consignation (No

tender of payment. No consignation)

EXC: Cases when immediate consignation is allowed.1. When the CR is absent or unknown, or does not

appear at the place of payment

2. When the CR is incapacitated to receive payment3. When, without just cause, the CR refuses to give

receipt

4. When two or more persons claim the same right tocollect

5. When the title of the obligation has been lost

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LOSS (Art. 1262)There is loss when

1. The thing perishes

2. Goes out of commerce

3. When it disappears in such way that the existence is

unknown or cannot be recovered.

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LOSS (Art. 1262)REQUISITES in order that the obligation is extinguised by

loss:

1. Obligation to deliver2. Obligation is specific/determinate

3. DR is free from fault or ne li ence

4. DR is not in default

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Instances when obligation is not

extinguished despite fortuitous event1. Art. 1165, DR is in default

2. Art. 1265, Obligation arising from a crime

3. When payment in solutio indebiti is in bad faith

4. When the DR promised to deliver the same thing to

two or more ersons who do not have the same

interest5. When the nature of the obligation requires the

assumption of risk

6. Obligation is to give a generic thing7. When it is stipulated

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CONDONATION (Art. 1270) The gratuitous abandonment by the CR of his right

REQUISITES:

1. There must be valid obligation2. The obligation is due

3. Condonation must be gratuitous

4. There must be acceptance by the DR5. It must strictly comply with the forms of donation

Over 5,000- must be in writing

Not over 5,000 may be oral

Real property must be in public instrument

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CONFUSION (Art. 1275) The meeting in one person of the qualities of CR and DR

with respect to the same obligation

REQUISITES:1. It must take place between the principal DR and CR

2. The merger must be clear and definite

3. Obligations are the same or identical

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COMPENSATION (Art. 1278) The extinguishment to the concurrent amount of the

debts of two persons who, in their own rights are DRs

and CRs of each other REQUISITES:

1. It must take place between the principal DR and CR

2. The merger must be clear and definite3. Obligations are the same or identical

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NOVATION (Art. 1291) The extinction of an obligation through the creation of a

new one which substitutes the old one.

DUAL PURPOSE:1. Original obligation is extinguished

2. A new obligation is created

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Obligation may be modified by:1. Changing their object or principal condition (Real

Novation)

2. Substituting the person of the DR (PersonalNovation)

(Personal Novation)

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Personal Novation

Change ofDR

Expromission

Delegacionersona

Novation

Change of

CR

VoluntarySubrogation

LegalSubrogation

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Expromission Initiative of payment comes from the third person

Only the consent of the CR and ND is required

The obligation of the OD is absolutely extinguished. In case of insolvency of ND, OD is forever absolved from

liabilit

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Delegacion Initiative of payment comes from the DR

OD, CR and third person (ND) must consent

The obligation of OD is extinguished GR: In case of insolvency of ND, the OD is generally

released from liability

:

1. When the insolvency of the ND is already existing atthe time of the delegacion + personal knowledge ofOD (GF is a defense)

2. When the insolvency of ND is already existing at thetime of the delegacion + known publicly (GF not adefense)

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Kinds of SubrogationVOLUNTARY LEGAL

Takes place by the

agreement of the

original CR, the 3rd

Takes place by

operation of law

person su stituting t eoriginal CR (new CR),

and the DR

A product of partiesagreement

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Rights of third person payor (Art. 1236-8)

Rights of 3rd

Payment withthe consent of

DR

He can ask forfull

reimbursement

Rights ofSubrogation

person payor

Payment W/Othe consent of

DR

Beneficial

Reimbursement

No right ofsubrogation

*No intention tobe reimbursed =

DONATION

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Legal Subrogation When a CR pays another CR who is preferred, even if,

without the DRs knowledge

When a 3rd person not interested in the obligation payswith the express or tacit approval of the DR

When, even without the knowledge of the DR, a person

interested in the fulfillment of the obligation pays, withoutprejudice to the effects of confusion as to the latters

share.