Payment and Obligations | Study notes Law

CHAPTER 4 EXTINGUISHMENT OF OBLIGATIONS

Art 1231. Obligations are extinguished:

1. By payment or performance

2. By the loss of the thing due

3. By the condonation or remission of the debt

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)

Additional causes of extinguishment of obligations

1. Death of a party (personal service obligation)

2. Mutual desistance or withdrawal

3. Arrival of resolutory period

4. Compromise

5. Impossibility of fulfillment

6. Happening of fortuitous event

SECTION 1 – Payment of Performance

Art. 1232. Payment means not only the delivery of

money but also the performance, in any other manner,

of an obligation

Meaning of payment

1. Delivery of money

2. Giving of a thing, doing of an act, not doing of

an act

In law, payment and specific performance are

synonymous.

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.

When debt is considered paid

1. Integrity of prestation – debt is not understood

to have been paid unless the thing or service

has been completely delivered or rendered.

2. Identity of prestation – the very prestation due

must be delivered or performed

Burden of proving payment

The burden of proving extinguishment by payment

devolves upon the debtor who claims payment. When

the debtor proves that obligation has been paid, burden

shifts to the creditor.

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.

Recovery allowed in case of substantial performance in

good faith

Article 1234 is the first exception to the rule laid down

in Article 1233.

Article 1234 embodies the doctrine of substantial

performance. There is substantial performance when

the important or essential part of the contract has been

performed. There is only a proportionate reduction in

the amount recoverable by the obligor.

Good faith is always presumed in the absence of proof

to the contrary.

Requisites for the application of Article 1234

1. There must be substantial performance

2. The obligor must be in good faith

Art. 1235. When the obligee accepts the performance,

knowing its incompleteness or irregularity, and

without expressing any protest or objection, the

obligation is deemed fully complied with.

Recovery allowed when incomplete or irregular

performance is waived (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.

Requisites for the application of Article 1235

1. Oblige knows the performance is incomplete or

irregular

2. He accepts the performance without expressing

any protest or objection

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CHAPTER 4 EXTINGUISHMENT OF OBLIGATIONS

Art 1231. Obligations are extinguished:

**1. By payment or performance

By the loss of the thing due
By the condonation or remission of the debt
By the confusion or merger of the rights of** **creditor and debtor
By compensation
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)** Additional causes of extinguishment of obligations
Death of a party (personal service obligation)
Mutual desistance or withdrawal
Arrival of resolutory period
Compromise
Impossibility of fulfillment
Happening of fortuitous event SECTION 1 – Payment of Performance Art. 1232. Payment means not only the delivery of money but also the performance, in any other manner, of an obligation Meaning of payment
Delivery of money
Giving of a thing, doing of an act, not doing of an act In law, payment and specific performance are synonymous. 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. When debt is considered paid
Integrity of prestation – debt is not understood to have been paid unless the thing or service has been completely delivered or rendered.
Identity of prestation – the very prestation due must be delivered or performed Burden of proving payment The burden of proving extinguishment by payment devolves upon the debtor who claims payment. When the debtor proves that obligation has been paid, burden shifts to the creditor. 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. Recovery allowed in case of substantial performance in good faith Article 1234 is the first exception to the rule laid down in Article 1233. Article 1234 embodies the doctrine of substantial performance. There is substantial performance when the important or essential part of the contract has been performed. There is only a proportionate reduction in the amount recoverable by the obligor. Good faith is always presumed in the absence of proof to the contrary. Requisites for the application of Article 1234
There must be substantial performance
The obligor must be in good faith Art. 1235. When the obligee accepts the performance, knowing its incompleteness or irregularity, and without expressing any protest or objection, the obligation is deemed fully complied with. Recovery allowed when incomplete or irregular performance is waived (principle of estoppel)
If the payment is incomplete or irregular, the creditor may properly reject it.
In case of acceptance, the law considers that he waives his right. The whole obligation is extinguished. Requisites for the application of Article 1235
Oblige knows the performance is incomplete or irregular
He accepts the performance without expressing any protest or objection

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. Person from whom the creditor must accept payment

The debtor
Any person who has an interest in the obligation (guarantor)
Third person who has no interest in the obligation when there is stipulation that he can make payment Creditor may refuse payment by a third person Creditor cannot refuse payment by a third person. Moreover, creditor should not be compelled to accept payment from a third person whom he may dislike or distrust. Effect of payment by a third person
If made without the knowledge or against the will of the debtor – payer can recover from the debtor only insofar as the payment has been beneficial to the latter.
If made with the knowledge of the debtor – payer shall have the rights of reimbursement and subrogation, recover what he has paid, acquire all the rights of the creditor Right of third person to subrogation Whoever pays on behalf of the debtor is entitled to subrogation if the payment is with the consent of the latter. If without or against the will of the debtor, third person cannot compel the creditor to subrogate. May there be subrogation, if the creditor willingly permits the payor to be subrogated in his rights? Since Art. 1237 is for the benefit of the debtor, the subrogation can only take place with his consent. Subrogation and reimbursement distinguished S – person who pays for the debtor is put into the shoes of the creditor; payor acquires right to be reimbursed and all other rights which the creditor could have exercised R – third person has merely the bare right to be refunded to the extend provided in the second paragraph of Article 1236. Art. 1238. Payment made by the 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. Payment by aa third person who does not intend to be reimbursed “embodies the idea that no one should be compelled to accept the generosity of another” 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” Meaning of “free disposal of thing due” and “capacity to alienate”
Free disposal of thing due – thing to be delivered must not be subject to any claim or lien or encumbrance of a third person
Capacity to alienate – person is not incapacitated to enter into contracts Free disposal of thing due and capacity to alienate required GR: In obligations to give, payment by one who does not have the free disposition of the thing due and capacity to alienate it is not valid. Thing paid can be recovered. XPN: Provided in Art. 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.

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. Special forms of payment

Dation in payment
Application of payments
Payment by cession
Tender of payment and consignation Meaning of dation in payment (adjudication or dacion en pago) Conveyance of ownership of a thing as an accepted equivalent of performance. It is not the ordinary way of extinguishing an obligation. Governing law The law of sales governs because dation in payment may be considered a specie of sale 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. Rule of the medium quality If the obligation consists in delivery of a specific thing, the very thing due must be delivered. 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. If there is disagreement between the parties, the law steps in and determines whether the contract has been complied with or not according to circumstances. 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. Debtor pays for extrajudicial expenses 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 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 a party to an action for his expenses incurred in the action. The costs of an action shall, as a rule be paid by the losing party. 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. Performance of obligation should be complete Contemplates obligations where there is only one creditor and only one debtor When partial performance is allowed
When there is an express stipulation to that effect
When the debt is in part liquidated and in part unliquidated
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 only when they have been cashed, or when through the fault of the creditor that they have been impaired. In the meantime, the action derived from the original obligation shall be held in abeyance. Meaning of legal tender Currency which is offered by the debtor in the right amount, the creditor must accept in payment of a debt in money.

Legal tender in the Philippines Debts in money shall be paid in the currency stipulated. If it is not possible or in the absence of stipulation, payment shall be made in the currency which is legal tender in the Philippines. All coins and noted issued by BSP are legal tender. Payment by means of instruments of credits

Right of creditor to refuse or accept – promissory notes, checks, bills of exchange and other commercial documents are not legal tender; creditor cannot be compelled to accept them.
Effect on obligation – payment by means of mercantile documents does not extinguish the obligation: a. Until they have been chased b. Unless they have been impaired through the fault of the creditor 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 the contrary. Meaning of inflation and deflation
Inflation – sharp sudden increase of money or credit or both
Deflation – reduction in volume and circulation of the available money or credit Basis of payment in case of extraordinary inflation or deflation the purchasing value of the currency at the time of establishment of the obligation shall be the basis of payment. This is subject to the agreement of the parties to the contrary. 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 Rule of Court. Place where obligation shall be paid
If there us stipulation, in the place designated
If there is a stipulation and the thing is specific, at the place where the thing was at the perfection of the contract
If there is no stipulation and the thing is generic, domicile of the debtor. the order above is successive and exclusive. Venue is the place where a court suit or action must be filed or instituted. Domicile is the place of a person’s habitual residence. Residence is only an element of domicile that simply requires bodily presence. 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 those 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 payment is made, the former cannot complain of the same, unless there is a cause for invalidating the contract. Meaning of application of payments 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. Requisites of application payments
One debtor and one creditor
Two or more debts
Debts must be of the same kind
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

Dation in payment and cession distinguished Dation Cession One creditor Several creditors Does not presuppose insolvency of debtor Debtor is insolvent at the time of assignment Does not involve all property of debtor Extends to all property of debtor Creditor becomes the owner of the thing given Creditor only acquire right to sell the thing Act of novation Not an act of novation Both substitute forms of payment or performance SUBSECTION 3. – Tender of Payment and Consignation Art. 1256. If the creditor to whom tender of payment has been refused without just cause to accept it, the debtor shall be released from responsibility by the consignation of the thing or some due. Consignation alone shall produce the same effect in the following cases:

1. When the creditor is absent or unknown, or **does not appear at the place of payment

When he is incapacitated to receive the** **payment at the time it is due
When, without just cause, he refuses to give a** **receipt
When two or more persons claim the same** **right to collect
When the title of the obligation has been lost** Meaning of “tender of payment” and “consignation”
Tender of payment – act on the part of debtor, of offering to the creditor the thing amount due.
Consignation – act of depositing the thing or amount due with the proper court Requisites of a valid consignation
Existence of a valid debt which is due
Valid prior payment by debtor and refusal without justifiable reason by creditor
Previous notice of consignation to persons interested in the fulfillment
Consignation of the thing or sum due
Subsequent notice of consignation made to the interested parties When tender of payment not required Tender of payment is not necessary before the debtor can consign the thing due with the court. A creditor who informs his debtor that payment will not be accepted waives payment on the date the payment is due. Debtor is excused from making a formal tender of the money on such date. Requirements for valid tender of payment
Must comply with the rules on payment or with the terms. The tender does not produce legal payment, unless it is completed by consignation
Must be unconditional and for the whole amount due and in legal tender
Must be actually made Art. 1257. In order that the consignation of the thing due may release the obligor, it must first be announced to the persons interested in the fulfillment of the obligation. The consignation shall be ineffectual if it is not made strictly in consonance with the provisions which regulate payment. Prior notice to person interested required In the absence of prior notice, consignation shall be void. The purpose is to give the creditor a chance to reflect on his previous refusal to accept payment Consignation must comply with provisions on payment Payment should be made in legal tender. The GR is that an offer of a bank check for the amount due is not a good tender except where no objection is made on that ground. Art. 1258. Consignation shall be made by depositing the things due at the disposal of judicial authority, before whom the tender of payment shall be proved, in a proper case, and the announcement of the consignation in other cases. The consignation having been made, the interested parties shall also be notified thereof. Consignation must be with proper judicial authority Consignation by depositing the thing or sum due with the proper judicial authority, is necessary to affect payment. Tender of payment must precede

consignation. When tender is not required, only prior notice to interested persons of the consignation needs to be proved. Notice to be given to interested parties of the consignation made After the consignation, interested parties must also be notified thereof. The purpose of second notice is to enable the creditor to withdraw the thing or sum deposited in case he accepts the consignation. Art. 1259. The expenses of consignation, when properly made, shall be charged against the creditor Creditor bears expenses of consignation Consignation is made necessary because of the fault or unjust refusal of the creditor to accept payment. The expenses are chargeable to the debtor if the consignation is not properly made. When consignation deemed properly made

When creditor accepts the thing or sum deposited without objection
When the creditor questions the validity of the consignation and the court declares that it has been properly made
When the creditor neither accepts nor questions the validity of the consignation and the court orders the cancellation of the obligation Art. 1260. Once the consignation has been duly made, the debtor may ask the judge to order the cancellation of the obligation. Before the creditor has accepted the consignation, or before a judicial declaration that the consignation has been properly made, the debtor may withdraw the thing or the sum deposited, allowing the obligation to remain in force. Withdrawal by debtor of thing or sum deposited Debtor can move for cancellation of the obligation by the court. Debtor may withdraw as a matter of right the thing or sum deposited
Before the creditor has accepted the consignation
Before a judicial declaration that the consignation has been properly made, he is still the owner of the same. The obligation shall continue to remain in force. All expenses are paid by debtor. Art. 1261. If, the consignation having been made, the creditor should authorize the debtor to withdraw the same, he shall lose every preference which he may have over the thing. The co-debtors, guarantors and sureties shall be released. Effect of withdrawal with authority of creditor Since consignation is for the benefit of the creditor, he may authorize the debtor to withdraw the deposit after he has accepted the same or after the court has issued an order cancelling the obligation.
As far as the debtor and the creditor are concerned, their relations will remain as they were before acceptance or cancellation. However, the creditor shall lose every preference which he may have over the thing.
The solidary debtors are released only from their solidary liability but not from their shares of the obligations.

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CHAPTER 4 EXTINGUISHMENT OF OBLIGATIONS