chapter 4, sec. 1 (arts. 1232-1261) obligations and contracts

CHAPTER IV, SEC. 1 – Payment or Performance (Articles 1232-1261)

CHAPTER 4 EXTINGUISHMENT OF OBLIGATIONS

GENERAL PROVISIONS

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,

fulfilment of a resolutory condition, and prescription, are governed elsewhere in this Code.

SECTION 1 – PAYMENT OR PERFORMANCE(Arts. 1232-1261)

STUDY GUIDE :

1. ART. 1232. – Concept of payment as a mode of extinguishing an obligation. –

(a) Delivery of money; and/or

(b) Performance of the prestation.

In law, payment and performance are synonymous.

It also embraces within its terms the payment of damages or penalty in lieu of the fulfilment of an obligation. (See Arts. 1170 & 1226)

2. How must payment be made?

Payment must be COMPLETE. (Art. 1233) As a general rule, partial or irregular payment or performance WILL NOT produce the extinguishment of an obligation.

3. What are the exceptions to the directive in Art. 1233?

The obligation will be deemed paid or fully complied with if :

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(a) There is (a.1.) substantial compliance (a.2) in good faith. In such case, the debtor may recover as though there had been strict and complete fulfillment, less damages suffered by the creditor. (Art. 1234)

(b) The creditor accepts payment (b.1.) knowing its incompleteness or irregularity, and (b.2) without expressing any protest or objection. (Art. 1235)

4. Who are the persons from whom the creditor is bound to accept payment or performance? (Art. 1236, par. 1)

(a) The debtor.

(b) Any person who has an interest in the obligation (like a guarantor).

(c) A third person who has no interest in the obligation, when there is a stipulation that he can make payment.

5. Suppose a third person pays for the debtor, how much can he recover from the debtor by way of reimbursement?

It depends.

(a) If made without the consent or against the will of the debtor, the third person can recover only insofar as the debtor has been benefited by the payment. In other words, the third person-payor is entitled only to REIMBURSEMENT. (Art. 1236, par. 2)

(b) If made with the consent of the debtor, the third person can recover whatever amount he has paid. In addition, the third person will be SUBROGATED to the rights of the creditor (e.g., rights arising from a mortgage, guaranty or penalty). Here, the third person-payor is entitled to REIMBURSEMENT + SUBROGATION. (Art. 1237)

(b.1.) SUBROGATION means the act of putting a person into the shoes of the creditor; hence, permitting that same person to exercise all the rights and actions that could have been exercised by the creditor.

6. Who are the persons to whom the debtor is bound to make payment? (Art. 1240)(a) The creditor.

(b) The creditor’s successor-in-interest (like an heir or assignee).

(c) Any person authorized by the creditor or by law to receive it.

7. When is payment to a third person valid?

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In two cases:

(a) The payment will be valid only in so far as it has redounded to the benefit of the creditor (e.g., the payment, or a part thereof, is delivered by the third person to the creditor). (Art. 1241)

(b) The payment is made in good faith to a person in possession of the credit. (Art. 1242)

8. What should be the object of payment?

It depends on the nature of the obligation.

(a) In a specific real obligation and personal obligation. – The very thing or service due. The creditor cannot be compelled to receive a prestation different from that which is due. (Art. 1244)

(b) In a generic real obligation. – The thing must be of the quantity and quality specified. If no quality is specified, the creditor may not demand a thing of superior quality, and the debtor may not deliver a thing of inferior quality. This is “the rule of the medium quality.” (Art. 1246)

9. When is partial payment allowed?

As a general rule, the creditor cannot be compelled to accept, and the debtor cannot be required to make, partial payment or performance. (Art. 1248, par. 1) The exceptions to this rule are :

(a) When there is an express stipulation or provision of law to that effect. (Art. 1248, par. 1)

(b) When the debt is in part liquidated and in part unliquidated. (Art. 1248, par. 2)

(c) When the different prestations in which the obligation consists are subject to different periods or conditions which affect some of them. (e.g., Where D owes C P10,000, and P6,000 of the debt is due today and P4,000 is due 30 days after; or in case the payment of P4,000 is subject to the fulfilment of a suspensive condition.)

10. In what currency shall payment of debt in money be made? (Art. 1249, par. 1)

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(a) In the currency stipulated.

(b) If there is no stipulated currency, in Philippine currency.

11. Commercial documents are NOT legal tender. The creditor, therefore, cannot be compelled to accept them as payment for a debt. Supposing, however, the creditor decides to accept a commercial document (such as a check) in payment of a debt, will the debt be extinguished? (Art. 1249, par. 2)

Acceptance of the check will be equivalent to payment only (i.e., the debt will be extinguished only) when :

(a) The check has been encashed.

Note: It is only when the check is dishonoured that the creditor can bring an action for non-payment of the debt (Art. 1249, par. 3).

(b) The check has lost its value because of the fault of the creditor.

12. Give the RULES regarding the place where payment shall be made.

(a) If there is a stipulation, payment shall be made in the place designated. (Art. 1251, par. 1)

(b) If there is no stipulation :(b.1) Delivery of a specific or determinate thing – payment shall be made at the

place where the thing was at the time of the perfection of the contract. (Art. 1251, par. 2)

(b.2.) Delivery of an indeterminate thing – delivery or payment must be made at the domicile of the debtor. (Art. 1251, par. 3)

13. What are the four (4) special modes or forms of payment under the Civil Code?

(a) Dation in payment, or adjudicacion en pago, or datio in solutum (Art. 1245)

(b) Application of payment or imputation of payment (Art. 1252)

(c) Payment by cession or assignment in favor of creditors (Art. 1255)

(d) Tender of payment AND consignation (Arts. 1256-1261)

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14. What is dation in payment?

It is that extraordinary mode of extinguishing an obligation whereby the debtor transmits his ownership over a property in favour of the creditor for the satisfaction of a monetary debt. In other words, an existing debt in money is satisfied, not by the payment of money (Art. 1244), but by the alienation of property. (Art. 1245)

Example : D owes C P200,000. On maturity date, if D does not have enough money to pay off his obligation to C, he may ask C to accept his (D’s) mountain bike worth P220,000 as payment for the obligation. If C consents, D’s obligation is extinguished by dation in payment.

15. What is application of payment? (Art. 1252, par. 1)

In this special mode of payment, the debtor indicates with particularity the specific debt to which the debtor’s payment should be applied, there being several debts owing to the creditor, and the debtor’s payment being insufficient to cover all the debts.

Application of payment can, therefore, be made use of only when the following requisites concur :

(a) There must be two or more debts;

(b) The debts must be of the same kind;

(c) The debts are owed by the same debtor in favour of the same creditor;

(d) All the debts must be due; and

(e) The payment must not be enough to extinguish all the debts.

16. Assuming all the requisites above are present, what are the rules to be observed in application of payment?

(a) Under the first paragraph of Art. 1252, it is the debtor who is given the preferential right to choose which among the debts due he is paying.

(b) If the debtor does not choose, the creditor may make the designation by specifying in the receipt which debt is being paid. (Art. 1252, par. 2)

(c) If neither the debtor nor the creditor has made the application, or if the application is not valid, then application is made as follows :

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(c.1.) Apply the payment to the most onerous debt among those due. (Art. 1254, par. 1)

(c.2.) If the debts are of the same nature and burden, apply the payment to all the debts proportionately. (Art. 1254, par. 2)

17. Art. 1253 mandates that, when interest is due on the debt, application of payment should be made first to the interest before the principal. Hence, the debtor cannot insist that his payment be credited to the principal first, instead of the interest.

18. Illustrative example on application of payment .

D owes C the delivery of the following objects :

(a) P100,000 due on January 15, 2013;(b) P100,000 due on March 15, 2013 to bear interest at 3% per month;(c) A Mitsubishi mini motorbike worth P100,000 due on May 15, 2013; and(d) P200,000 due on June 30, 2013.

On July 15, 2013, C went to the house of D to demand the fulfillment of D’s obligation. While D was willing to make payment to C, all that D had was P100,000. Applying the rules on application of payment :

(a) D will pay C the P100,000, and inform her that the said payment will specifically be applied to the P100,000 debt due on March 15, 2013. D cannot insist that C accept the payment for the P200,000 debt due on June 30 because it would amount only to a partial payment. Under Art. 1248, C cannot be compelled to receive partial payments. Neither can D apply the P100,000 payment to the motorbike, though of the same value, because it is not of the same kind (Art. 1252).

(b) If D does not indicate to which of the debts he will apply his payment of P100,000, C (after receiving payment) may indicate in the receipt given to D that: “I hereby acknowledge receipt from D of the amount of P100,000, which is hereby applied to the P100,000 debt of D which became due on January 15, 2013.” If D receives the receipt without question, he cannot later on complain that the P100,000 payment should have been applied first to the P100,000 debt due on March 15, 2013, because the same bears an interest.

(c) If D or C does not make any designation, then the payment will be made to apply first to the most onerous debt. Among the debts which are of the same kind, the most onerous is the P150,000 due on March 15, 2013, because it is the one that bears interest

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at the rate of 3% per annum. In this case, as of July 15, 2013, when payment was tendered, the P100,000 debt due on March 15, 2013 will have already earned interest for four months equivalent to P12,000. Hence, applying Art. 1253, the P100,000 payment will be applied first to the interest of P12,000. The remaining P88,000 will be applied to the principal obligation leaving an outstanding balance of P12,000 on the principal obligation due for payment to C.

(d) Let us assume that in the example given in No. 18, the only debts owing from the debtor to the creditor are :

a. P100,000 due on January 15, 2013; andb. P200,000 due on June 30, 2013;

P300,000 (total debt due)

which are both of the same kind, nature and burden. In this case, if neither the debtor nor the creditor makes a designation, the rule in the 2nd paragraph of Art. 1254 will apply. The payment of P100,000 will be applied proportionately to the two (2) debts. Hence, P33,333.33 (P100,000/P300,000 X P100,000) will be deducted from the P100,000 debt, and P66,666.67 (P200,000/P300,000 X P100,000) will be deducted from the second. The first debt will have a remaining balance of P66,666.67. On the other hand, the second debt will have a remaining balance of P133,333.33. The ratio here of the first debt to the second debt is thus preserved, namely, 1 is to 2.19. What is payment by cession? (Art. 1255)

In this special mode of payment, the debtor transfers all his properties, not subject to execution, in favour of his creditors, so that the latter may sell them and apply the proceeds to their respective credits.

20. What are the requisites of payment by cession?

(a) There must be more than one debt;(b) There must be more than one creditor;(c) The debtor must be insolvent; (d) The debtor must abandon all his properties not exempt from execution in favour

of the creditors; and(e) The cession must be accepted by the creditors.

21. What are the effects of payment by cession? (Art. 1255)

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(a) Unlike in dation in payment, the creditors do not become the owners of the properties ceded by the debtor as payment for the debts. The creditors merely become assignees of the debtor with authority to sell the properties.

(b) The debtor is released from his obligations but only to the extent of the net proceeds of the sale, unless there is a stipulation to the contrary. The balance, therefore, remains collectible from the debtor.

22. Illustrative example of payment by cession . –

D is indebted to C1, C2 and C3 in the total amount of P2M. Later, D became bankrupt and was left with no other assets but the following :

(a) A farm lot worth P1.5M; and(b) A Toyota Altis car worth P1.1M.

With the consent of C1, C2 and C3, D can assign the above properties in favour of the said creditors, so that they may be sold. The proceeds from the sale of the properties will then be used to satisfy the respective claims of the creditors. If the net proceeds from the sale of the properties amount only to, let us say, P1.8M, then D is still liable for the balance of P200,000 to the creditors.

23. What is tender of payment?

It is the act, on the part of the debtor, of offering to the creditor the thing or amount due. The debtor must, therefore, show that he has in his possession the thing or money to be delivered at the time of the offer. Tender of payment is extrajudicial.

24. What is consignation?

Consignation is the act of depositing the thing or amount due with the proper court when the creditor does not desire or cannot receive it, after complying with the formalities required by law (Art. 1256, par. 1). Consignation is essentially judicial and, therefore, presupposes the existence of a case filed in court by the debtor against the creditor to compel the latter to accept the payment. Without a court case, there can be NO consignation and the debtor will not be released from his obligation.

25. What are the requisites of a valid consignation?

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(a) Existence of a valid debt which is due. (Art. 1256, par. 1)

(b) Tender of payment by the debtor and refusal, without justifiable reason, by the creditor to accept it. (Art. 1256, par. 1)

(c) Previous notice of consignation to persons interested in the fulfillment of the obligation (such as guarantors, mortgagors, solidary debtors and/or solidary creditors). (Art. 1257, par. 1)

(d) Consignation (deposit in court) of the thing or sum due. (Art. 1258, par. 1)

(e) Subsequent notice of consignation made to the interested parties. (Art. 1258, par. 2)

26. What is the effect of a tender of payment made without consignation?

A tender of payment made, even if the creditor unjustifiably refuses to accept payment or performance, if not followed by a subsequent consignation in court of the object of the obligation, shall NOT extinguish the obligation. 27. If a tender of payment without consignation does not extinguish the obligation, the

reverse is also true. In other words, a consignation without a previous tender of payment will not likewise extinguish the obligation and release the debtor. There are, however, cases when consignation ALONE, without need of a prior tender of payment, will produce the effect of payment and, consequently, extinguish the obligation. What are these exceptional cases? (Art. 1256, par. 2)

(a) When the creditor is absent or unknown, or does not appear at the place of payment;

(b) When the creditor is incapacitated to receive the payment at the time it is due;(c) When without cause, the creditor refuses to give a receipt;(d) When two or more persons claim the same right to collect the obligation; and(e) When the title of the obligation has been lost.

28. What are the effects if the consignation is properly made?

(a) The debtor may ask the court to order the cancellation of the obligation. (Art. 1260, par. 2)

(b) The expenses of consignation shall be charged against the creditor. (Art. 1259)

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29. After having desposited the thing or sum due with the court, may the debtor still withdraw the same? (Art. 1260, par. 2)

YES, but the withdrawal must be made :

(a) before the creditor accepts the consignation; or

(b) before the court declares that the consignation has been properly made by the debtor, and orders the cancellation of the debtor’s obligation.

In such a case, the obligation shall continue in force, and the expenses for the consignation shall be borne by the debtor.

30. What will be the effect if the creditor himself authorizes the debtor to withdraw the deposit (a) after the creditor has accepted the consignation, or (b) after the court has issued an order cancelling the debtor’s obligation? (Art. 1261) (a) The debtor’s obligation to the creditor shall continue to subsist.(b) The creditor shall lose every preference which he may have over the thing.(c) The co-debtors, guarantors and sureties shall be released.

31. Illustrative example on tender and consignation . –

On January 15, 2012, D borrowed P500,000 from C payable on January 15, 2013. It was agreed upon by the parties that should D default in the payment of the loan, D will pay a penalty interest of 10% or P50,000. On January 15, 2013, D tendered payment to C in the amount of P500,000. C, however, refused to accept the payment from D and never informed D of the reason for his refusal. To make sure that he will not be charged for the penalty on account of delay for failure to pay on due date, D filed an action for consignation with the court, and deposited the amount of P500,000 with the court. If the court finds the consignation to have been properly made pursuant to the requirements of law, the court may order the cancellation of the obligation. At this point, the obligation of the debtor will be considered extinguished. In other words, while the creditor may not have actually received payment of the obligation on the maturity date agreed upon by the parties, the debtor is deemed to have complied with his obligation by properly making a tender of payment, and by consignation of the thing or sum due with the court.

APPLICATION/PROBLEMS :

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1. On January 15, 2012, Andrew borrowed money from Solo in the amount of P1M due for payment on January 1, 2013 at 25% interest per annum. By end of October, 2012, Andrew suffered financial reverses so he went to visit his college best friend John. Andrew asked John if he could borrow from John without interest to pay his P1M debt with Solo which was to be due on January 15, 2013. John promised to help Andrew. Three days after he saw John, Andrew luckily won in the Bingo games at SM, and partially paid Solo the amount of P850,000. Unknown to Andrew, however, on the very day that he saw John, John immediately went to Solo and paid Andrew’s debt in the amount of P1M plus the 25% interest due in the amount of P250,000. Can John later on recover from Andrew the entire P1,250,000 that he paid to Solo? Art. 1236

2. On March 15, 2012, Jun borrowed from Chris the amount of P350,000 payable on March 15, 2013. As security for the loan, Jun mortgaged his 90-square meter lot in Dasmarinas, Cavite, which was valued at P500,000, to Chris. On February 28, 2013, Jun’s cousin, Lucille, paid Chris P350,000 without consulting Jun about it. When the obligation, however, fell due on March 15, 2013, Jun was already insolvent. Arvin, the husband of Lucille, now seeks to foreclose Jun’s 90-square meter mortgaged property, so he and his wife can recover the P350,000 payment advanced by Lucille to Chris. Can Arvin foreclose the mortgaged property? Art. 1237

3. Baldo obliged himself to deliver to Raoul a Jaguar car. Not having been able to obtain a Jaguar, Baldo convinced Raoul to accept instead a Rolls Royce car which was a more expensive car. Raoul, however, refused to accept a Rolls Royce, and insisted that Baldo deliver to him a Jaguar. Is Raoul legally justified in refusing to accept the Rolls Royce car considering that the same is even more expensive than the Jaguar car?

4. Ruben owes Ed P50,000. On maturity date, Ruben offered to pay Ed the amount of P45,000, which was the only money he then had. Ed, however refused to accept the payment. Thereafter, Ruben bumped into the 30-year old son of Ed, Joshua, to whom Ruben gave the P45,000 with a request that Joshua turn over the money to his father. Instead of delivering the money to his father, however, Joshua immediately went to the casino, and squandered the entire amount in the slot machines.

(a) Was Ed justified in refusing to accept the payment offered by Ruben?(b) May Ed still recover the full amount of P45,000 from Ruben after the said amount

was squandered in its entirety by his son Joshua? Arts. 1245 & 1240

5. Marissa owes Retchel P100,000 due on December 15, 2013. On maturity date, Marissa presented to Retchel a dated MBTC check in the amount of P100,000 with a certification from the bank manager that Marissa was a client in good credit standing who has been banking with MBTC for almost 30 years. Despite the tender of payment and the

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certification issued by the bank manager, Retchel, however, refused to accept the payment and insisted that Marissa pay her in cash. Is Retchel justified in rejecting this tender of payment made by Marissa, it being certain that the amount of the check will later on be cleared for sufficiency of funds in her (Retchel’s) favor? Art. 1249

6. Ricky is a tenant of an apartment owned by George. On June 30, 2013, George gave Ricky fifteen days, or until July 15, 2013, within which to leave the leased apartment on the ground that Ricky had not been paying his rental for two months already. In his defense, Ricky stated that every month, George’s collector went to the house of Ricky and collected the rents, and issued a receipt therefor. For the past two months, however, Ricky was ready and willing to pay the rents and waited for the collector as usual. But the collector never showed up. Hence, Ricky’s rental arrears amounted to two months. Does Ricky’s argument have legal basis? Art. 1251 (3rd par.)

7. Ben owes Jude P50,000 with 25% interest. On the due date, Ben tenders payment to Jude but only for P50,000 when it should be P62,500. How will you apply the payment? Art. 1253

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chapter 4, sec. 1 (arts. 1232-1261) obligations and contracts

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