EXTINGUISHMENT OF OBLIGATIONS JAYE R. BALBIN, ECE, MEP-ECE
MODE OF EXTINGUISHING AN OBLIGATION
PRIMA PRIMAR RY CLASS CLA SS UNDER UNDER ART ART. 1231 123 1
Payment or performance
Loss of the thing due
Condonation or remission of the debt
Confusion or merger of the rights of credi creditor tor and debtor
Compensation
Novation
MODE OF EXTINGUISHING AN OBLIGATION
PRIMA PRIMAR RY CLASS CLA SS UNDER UNDER ART ART. 1231 123 1
Payment or performance
Loss of the thing due
Condonation or remission of the debt
Confusion or merger of the rights of credi creditor tor and debtor
Compensation
Novation
OTHER CAUSES C AUSES
Annulment
Rescission
Fulfillmentt of a resoluto Fulfillmen resolutory ry condition
Prescription
Occurrence of fortuitous event
Expiration of resolutory period
Impossibility of performance
Death of a party
Compromises
Insolvency and bankruptcy
SECTION 1 - PAYMENT OR PERFORMANCE
Art. 1232 – 1232 – Pa Payment yment means not only the delivery of money but also the performance, in any other manner, of an obligation
Payment – Payment – aa mode of extinguishing an obligation which consists of:
The delivery del ivery of money mo ney,, or
The performance in any other manner of an obligation
Example:
If the obligation is to give a specific car, payment is made by delivering a thing.
If the obligation is to repair a computer, payment is made by performing the service.
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 maybe. 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.
Example:
Louie is obliged to paint red the car of Justin. Louie painted the car but the color bordered on maroon. Justin accepted the performance although it was irregular and he did not express any protest or objection to it. In this case, Louie is deemed to have fulfilled his obligation.
Art. 1234 – Payment made to the creditor by the debtor after the latter has been judicially ordered to retain the debt shall not be valid.
Garnishment - the proceeding in which the court orders the debtor not to make payment to his creditor, but to the creditor of his creditor
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.
Dacion en pago, adjudicacion en pago, datio in solutum – an objective novation of the obligation where the thing offered as an accepted equivalent of performance is considered as the object of contract of sale, while the debt is considered as the purchase price.
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.
Legal tender – the money or currency which a debtor may compel his creditor to accept in payment of his debt, whether public or private. It is the money that is legally valid for the payment of debts and that must be accepted for that purpose when offered.
Section 52 of RA. 7653 (the New Central Bank) as adjusted by Circular No. 537 issued on July 18, 2006, the following are legal tender in the Philippines:
One (1) sentimo, 5-sentimo, 10-sentimo, 25-sentimo coins are legal tender up to P100. One (1) piso, 5-piso, 10-piso are legal tender up to P1000. All bills are legal tender up to any amount.
Example :
Javier borrowed P5000 from Alexander. On due date, Javier tendered payment amounting to P5000 consisting of 5000 pieces of P1.00 coin. Here Alexander may validly refuse the payment being offered because P1.00 coins are legal tender only up to P1000.
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.
Inflation – a sharp sudden increase in money and credit or both without a corresponding increase in business transactions. Extraordinary inflation – understood to be any uncommon decrease in the purchasing power of the currency which the parties could not have reasonably foreseen and has been due to war or the effect thereof, or any other unusual force majeure or fortuitous event. Deflation – a sharp sudden decrease in money or credit or both without a corresponding decrease in business transactions. Extraordinary deflation - understood to be any uncommon increase in the purchasing power of the currency which the parties could not have reasonably foreseen and has been due to war or the effect thereof, or any other unusual force majeure or fortuitous event.
Subsection 1 – APPLICATION OF PAYMENTS (Art. 1252)
Application of payment the designation of the debt to which payment shall be applied when the debtor owes several debts in favor of the same creditor.
Requisites of application of payment:
–
There must be two or more debts. The debts must be of the same kind. The debts are owed by the same debtor to the same creditor All debts are due, except:
When the parties have stipulated that payment may be applied to a debt not yet due. When the application to a debt not yet due is made by the party for whose benefit the term has been constituted.
The amount given in payments is not enough to cover all the debts.
Subsection 2 – PAYMENT BY CESSION (Art. 1255)
Payment by cession – the abandonment or assignment by the debtor of all his properties in favor of his creditors so that the latter may sell them and recover their claims out of the proceeds.
Requisites of payment by cession:
There must be two or more creditors
The debtor must be insolvent, either partially or completely.
The debtor abandons all his properties except those exempt from execution
The creditors accept the abandonment.
Kinds of payment by cession
Voluntary or conventional that which is agreed upon by the parties and which requires the consent of all the creditors.
Legal cession by operation of law; this is governed by the Insolvency Law and requires that majority of the creditors must agree.
–
–
Subsection 3 – TENDER OF PAYMENT AND CONSIGNATION (Art. 1256)
Tender of payment – the act of the debtor of offering to the creditor what is due him.
Consignation – the act of depositing the sum or thing due with judicial authorities whenever the creditor refuses without just cause to accept the same, or in cases when the creditor cannot accept it.
SECTION 2 – LOSS OF THE THING DUE
Art. 1262 – An obligation which consists in the delivery of a determinate thing shall be extinguished if it should be lost or destroyed without the fault of the debtor, and before he has incurred in delay. When by law or stipulation, the obligor is liable even in fortuitous events, the loss of the thing due does not extinguish the obligation, and he shall be responsible for damages. The same rule applies when the nature of the obligation requires the assumption of risk. Art. 1263 – In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does not extinguish the obligation.
Loss – A thing is considered lost when it perishes, or goes out of commerce, or disappears in such a way that its existence is unknown or it can not be recovered. Loss includes the physical or legal impossibility of the service in which the obligation consists.
For loss to extinguish an obligation, it should occur after the constitution of the obligation. If the loss occurred prior thereto, the obligation would not have any subject matter and will be considered void.
Art 1264 – The court shall determine whether, under the circumstances, the partial loss of the object of the obligation is so important as to extinguish the obligation.
Example:
Jolo agreed to deliver a specific horse which was meant for entry in the derby race to Gerard. The right front leg of the horse, however, was broken when the horse accidentally fell down a ditch. While the horse could still walk, it could no longer run. In this case, the partial loss of the leg is so important as to extinguish the obligation. If the horse, however, was meant to be used as a modelin a portrait to be painted by Gerard, the partial loss of the leg is not important as to extinguish the obligation.
Art. 1265 – Whenever the thing is lost in the possession of the debtor, it shall be presumed that the loss was due to his fault, unless there is a proof to the contrary, and without prejudice to the provisions of article 1165. This presumption does not apply in case of earthquake, flood, storm or other natural calamity.
Art. 1266 – The debtor in obligation to do shall also be released when the prestations becomes legally or physically impossible without the fault of the obligor.
Art. 1267 – When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be released therefrom, in whole or in part.
Example:
Tronqs agreed to drill manually a 25-meter deep well for Jackie. After having drilled 10 meters, Tronqs found difficulty in drilling deeper because he came upon a marble rock. Tronqs may be released from his obligation, either in whole or in part.
Art. 1269 – The obligation having been extinguished by the loss of the thing , the creditor shall have all the rights of action which the debtor may have against third persons by reason of the loss.
Example :
Tracy insured her house against fire with Bea’s Insurance Company. Odessa burns the house. If Bea’s Insurance Company pays the policy amount to Tracy, it shall have the right to recover from Odessa.
SECTION 3 – CONDONATION OR REMISSION OF THE DEBT (Art. 1270)
Condonation or remission – is the gratuitous abandonment by the creditor of his right. In plain language, this refers to the forgiveness of indebtedness. To extinguish the obligation, the consent of the debtor is required.
Example:
Dexter borrowed P4,000 from Kimchi. The debt is evidenced by a promissory note executed by Dexter. On due date, Kimchi informs Dexter that he will no longer be collecting the debtand delivers the note to Dexter. Dexter accepts Kimchi’s generosity. Dexter’s obligation is extinguished by condonation or remission.
Kinds of condonation or remission
As to amount or extent
Total – when the obligation (both the principal and accessory obligations) is extinguished.
Partial – when only part of the obligation, or only the accessory obligation is remitted.
As to form
Express – one made orally or in writing. It must, to be valid, comply with the formalities of donation.
Implied – one inferred from the conduct of the parties, such as when the creditor voluntarily delivers the private document evidencing the credit to the debtor.
As to date of effectivity
Inter vivos – one that takes effect during the lifetime of the donor (creditor) Mortis causa – one that takes effect upon the death of the donor (creditor) and partakes of the nature of a testamentary disposition.
Requisites of condonation:
The obligation must be damandable at the time of remission.
The cause or consideration must be the liberality of the creditor.
This is so because condonation is essentially gratuitous. It is generally presumed.
It must be accepted by the debtor.
It must not be inofficious.
The condonation is inofficious if it impairs the legitimate, i.e. The portion of the estate which the law reserves for the compulsory heirs.
Art. 1272 – Whenever the private document in which the debt appears is found in the possession of the debtor, it shall be presumed that the creditor delivered it voluntarily, unless the contrary is proved.
Example :
Armando issued a promissory note for P10,000 payable to the order of Marloun After one month, the note was found in the possession of Armando. There is here the presumption that Marloun voluntarily delivered the note to Armando. Marloun, however is allowed to prove that the note was taken from him without his consent, such as when it was obtained from him by force or that it was stolen from him.
SECTION 4 – CONFUSION OR MERGER OF RIGHTS (Art. 1275)
Confusion or merger – is the meeting in one person of the characters of debtor and creditor. The obligation here is extinguished because it is now absurd for the creditor to claim payment from himself.
Example:
JL issues a promissory note payable to the order of Luis. Luis indorses the note to Jhong, Jhong indorses the note to Billy, Billy indorses the note back to JL. The obligation here is extinguished because JL, the debtor and maker of the note, is now the creditor of himself.
Art. 1276 – Merger which takes place in the person of the principal debtor or creditor benefits the guarantors. Confusion which takes place in the person of any of the latter does not extinguish the obligation.
Effect of merger in the person of the principal debtor or creditor when there is a guarantor.
Merger in the person of the principal debtor or creditor benefits the guarantor.
Art. 1277 – Confusion does not extinguish a joint obligation except as regards to the share corresponding to the creditor or debtor in whom the two chracters concur. Merger in joint obligation
In joint obligation, merger taking place in the person of one of the joint debtors or joint creditors extinguishes only the share corresponding to the debtor or creditor in whom the two characters concur. Example:
Janette, Jenny and Flor, joint debtors, issued a promissory note for P30,000 payable to Marian. Marian assigns the note to Cha, Cha to Cyrel, and Cyrel to Janette. Here only Janette’s share amounting to P10,000 is extinguished because it is only in her person where the qualities of debtor and creditor concur. Jenny and Flor are still liable for P20,000 to Janette who is now the new creditor.
Merger in solidary obligation
Merger in one of the solidary debtors or solidary creditors extinguishes the whole obligation. (Art.1215). The solidary debtor in whom the characters of debtor and creditor concur can demand reimbursement from his co debtors. (Art. 1217). In the case of solidary creditors, he shall be liable to his cocreditors for the share corresponding to each of them. (Art. 1215) Example:
Richard, Ron and Ralph, solidary debtors, issued a promissory note for P30,000 payable to Apol. Apol assigns the note to Teya, Teya to Kaye and Kaye to Richard. Here, the entire obligation is extinguished with all the debtors now being the creditors. Richard, however, can go after Ron and Ralph for reimbursement at P10,000 each. It is as if Richard paid the whole obligation.
SECTION 5 – COMPENSATION (Art. 1278)
Compensation – mode of extinguishing an obligation when two persons, in their own right, are debtors and creditors of each other.
Example:
Arjay owes JR P10,000. JR owes Arjay P10,000. Both debts are due. The parties need not pay each other as their obligations are extinguished by compensation.
Kinds of compensation
As to amount or extent
Total – when the debts are of the same amount. (Art. 1281) Partial – when the debts are of different amounts. (Art. 1281)
As to cause or origin
Legal – one that takes place by operation of law. (Art. 1279). It operates even against the will of the interested parties and even without their consent. Such compensation takes effect, ipso jure (which means “by the law itself ”) Voluntary or conventional – one that takes place by agreement of the parties. (Art. 1282) Judicial – one that is ordered by the court. (Art. 1282) Facultative – one that may be claimed or opposed by one of the parties. (Art. 1287, 1288)
Assignment of credits – a contract whereby a person (assignor) transfers his credit, right or action against a third person to another (assignee) for a consideration certain in money or its equivalent. (Art. 1458, 1475 and 1624)
Example:
Gerard owes Kim P10,000. The debt is evidenced by promissory note executed by Gerard and payable to Kim. Kim assigns the note to Simon with notice to Gerard.The contract between Kim and Simon is known as assignment with Kim as the assignor and Simon , the assignee. Gerard will have to make the payment to Simon and no longer to Kim.
Deposit – a contract whereby a person receives a thing belonging to another with the obligation of safely keeping it and of returning the same.
Commodatum – a contract whereby a party delivers to another a non-consumable thing so that the latter may use the same for a certain time and return it. (Art. 1933)
SECTION 6 – NOVATION (Art. 1291)
Novation – the modification or extinguishment of an obligation by another, either by changing the object or pricipal condition, substituting the person of the debtor, or subrogating a third person in the rights of the creditor. (Art. 1291)
Novation has a dual function in that at the time it extinguishes an obligation, it creates a new one in lieu of the old.
Kinds of novation
According to object or purpose
Real or objective novation – novation by changing the object or principal condition.
Personal or subjective novation – novation by change of the parties (debtor or creditor)
Substituting the person of the debtor, which may be by expromision or delegacion. (Art. 1293, 1294 and 1295)
Subrogating a third person in the rights of the creditor, which may be conventional or legal. (Art. 1300-1302)
Mixed novation – change of object and parties
According to form
Express novation – novation declared in unequivocal terms. (Art. 1292). i.e. Novation by express declaration of the parties.
Implied novation – when the old and the new obligation are on every point incompatible with each other. (Art. 1292)
According to extent
Total or extinctive novation – when the old obligation is totally extinguished.
Partial or modificatory novation – when the old obligation remains in force except as it has been modified; also called imperfect or improper novation
Kinds of novation by substitution of the person of the debtor
Expromision – this is substitution of debtors initiated by a third person who assumes the obligation with the creditor’s consent.
Delegacion – this is substitution of debtors initiated by the debtor himself where a third person assumes the obligation with the creditor’s consent.
Subrogation – the substitution of another person in the place of the creditor, so that the person in whose favor it is exercised succeeds to the right of the creditor in relation to the debt.
Example:
Jose obtained a loan of P1,000,000 from Wally. The debt is guaranteed by Paolo. Later, Wally assigned the credit to Jimmy with consent of all the parties. The rights of Wally against Jose and Paolo are transferred to Jimmy. Thus, Jimmy acquires the right to collect from Jose. If Jose cannot pay, Jimmy can proceed against Paolo, the guarantor.
Kinds of subrogation
Conventional subrogation – one that takes place by agreement of the original parties and the third person. (Art. 1301). This must be clearly established in order that it may take effect. (Art. 1300)
Legal subrogation – one that takes place by operation of law.
