Extinguishment of Obligations Flashcards
What are ways that obligations are extinguished?
- 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: annulment, rescission, fulfillment of a resolutory condition, and prescription (but governed elsewhere in the Civil Code).
Other causes if extinguishment of obligations
- Death of a party in case the obligation is a personal one
- Mutual desistance or withdrawal
- Arrival of resolutory period
- Compromise
- Impossibility of fulfillment
- Happening of a fortuitous event
If a mutual agreement can create a contract, a mutual disagreement by the parties can cause its extinguishment. T or F.
True.
What is a write-off?
It is a financial accounting concept that allows for the reduction in value of an asset or earnings by the amount of an expense or loss. It is not a legal ground for extinguishing an obligation under the Civil Code.
Classifications of modes of extinguishment of obligations
- Voluntary
a. Performance
i. Payment
ii. Consignation
b. Substitution
i. Dacion en pago (conveyance for payment)
ii. novation
c. By release agreement
i. Agreement subsequent to the constitution of the obligation (mutual waiver, unilateral waiver, remission)
ii. Agreement simultaneous to the constitution of the obligation (resolutory condition and extinctive period) - Involuntary
a. By reason of the subject
i. confusion
ii. Death of the contracting parties in the cases where the obligations are personal
b. By reason of the object
i. Loss of the thing due or impossibility of performance
c. By failure to exercise (right of action)
i. Extinctive prescription
What is payment?
It consists of not only in the delivery of money but also the giving of a thing (other than money), the doing of an act, or not doing of an act.
Payment = specific performance
Elements of Payment
- Persons (who may pay and to whom payment may be made)
- Thing or object in which payment must consist
- The cause thereof
- The mode or form thereof
- The place and the time in which it must be made
- The imputation of expenses occasioned by it
- The special parts which may modify the same and the effects they generally produce
What is burden of proof?
It is the duty of a party to present the amount of evidence required by law, of the facts in issue necessary to prove the truth of his claim or defense.
What is the burden of proving payment?
It rests upon the debtor to show with preponderance of evidence that the obligation has been discharged by payment by documentary or parol evidence.
When is a debt considered paid?
a. Integrity of the prestation. When such thing or service had been delivered or rendered completely.
Partial or irregular performance will not produce the extinguishment of an obligation, neither a late partial payment forestall a long-expired maturity date.
b. Identity of the prestation. If the very prestation agreed upon was delivered or performed.
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. T or F.
True
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. T or F.
True
Define “acceptance of performance”
To take as satisfactory or sufficient or to give assent to or to agree or accede to an incomplete or irregular performance.
The mere receipt of partial payment is not equivalent to acceptance of performance within the purview of Article 1235 as would extinguish the whole obligation.
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
ok
Persons from whom the creditor must accept payment
a. 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 stipulation that he can make payment
Effect of payment by a third person
a. If made without the knowledge or against the will of the debtor - the payer can recover from the debtor only in so far as the payment has been beneficial to the latter
b. If made with the knowledge of the debtor - the payer shall have the rights of reimbursement and subrogation and to acquire all the rights of the creditor.
Subrogation v. reimbursement
Subrogation
- the person who pays for the debtor is put into the shoes of the creditor
- no real extinction of the obligation, but only a change of creditor
Reimbursement
- the third person entitled by reason of payment has merely the bare right to be refunded
If the paying third does not intend to be reimbursed, does this require the consent of the debtor?
Yes. Art. 1238
**However, if the creditor accepts the payment, it shall be valid as to him and the payor although the debtor did not give his consent to the donation.
What happens when someone pays something he does not have the free disposal of?
The thing paid can be recovered.
If S is a minor between 18 and 21 years and he voluntarily pays a sum of money to B in fulfillment of his obligation, can the money be recovered if B has spent it in good faith?
No. Art. 1427
Persons to whom payment shall be made
a. creditor or obligee
b. his successor in interest
c. any person authorized to receive it
Payment made to a third person shall be valid if it it benefits the creditor. That the creditor was benefited by the payment made cannot be presumed. However, there are exceptions. What are these?
- If after the payment, the third person acquires the creditor’s right (subrogation)
- If the creditor ratifies the payment to the third person (ratification by the creditor)
- If by the creditor’s conduct, the debtor has been led to believe that the third person had authority to receive the payment (estoppel on the part of the creditor)
Garnishment
A legal procedure by which a creditor can collect what a debtor owes by reaching the debtor’s property when it is in the hands of someone other than the debtor.
Special forms of payment
- dation in payment
- application of payments
- payment by cession
- tender of payment and consignation
Dation in payment (adjudication or dacion en pago)
It is the conveyance of ownership of a thing by the debtor to the creditor as an accepted equivalent of an outstanding performance of a monetary obligation.
Requisites of dacion en pago
- There must be performance of the prestation in lieu of payment which may consist in the delivery of a corporeal thing or a real right or a credit against a third person
- There must be some difference between the prestation due and that which is given in substitution
- There must be an agreement between the creditor and debtor that the obligation is immediately extinguished by reason of the performance of a prestation different from that due.
Sale v. dacion en pago (1245)
(1)
sale: there is no pre-existing credit
dation: there is pre-existing credit
- this is why dep is a special form of payment
(2)
sale: obligations are created (suspensive)
dation: payment, obligations are extinguished (resolutory)
(3)
sale: the cause is the price paid from the viewpoint of the seller, or the acquisition of the thing sold from the viewpoint of the buyer
dation: the cause is the extinguishment of the debt from the viewpoint of the debtor, or the acquisition of the object in lieu of the credit from the viewpoint of the creditor
(4)
there is more freedom in fixing the price than in dation
(5)
sale: buyer still has to pay the price
dation: payment is received before the contract is perfected which is to be charged against the debtor’s debt
(6)
sale: the parties deliver and receive the thing as seller and buyer
dation: the parties deliver and receive the thing as debtor and creditor
Cases wherein partial performance of obligation is allowed
- When there is an express stipulation to that effect
- When the debt is in part liquidated (definitely determined or determinable) 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
- When the parties know that the obligation reasonably cannot be expected to be performed completely at one time
- When there is abuse of right or if good faith requires acceptance
Legal tender
The currency which a debtor can legally compel a creditor to accept in payment of a debt in money when tendered by the debtor in the right amount.
**Legal tender in the Philippines means currency prescribed by law to be accepted for the
Requisites for application of Article 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.”
- There is an official declaration of extraordinary inflation or deflation from the Bangko Sentral ng Pilipinas
- The obligation is contractual in nature
- The parties expressly agreed to consider the effects of the extraordinary inflation or deflation
Place where obligation shall be paid
- If there is a stipulation, the payment shall be made in the place designated
- If there is no stipulation and the thing to be delivered is specific, the payment shall be made at the place where the thing was, at the perfection of the contract
- If there is no stipulation and the thing to be delivered is generic, the place of payment shall be the domicile of the debtor. In this case, the creditor bears the expenses in going to the debtor’s place to accept payment (except when debtor changes his domicile in bad faith).
Application of payments
The 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 of payments
- There must be one debtor and one creditor
- There must be 2 or more debts
- The debts must be of the same kind
- The debts to which payment made by the debtor has been applied must be due
- The payment made must not be sufficient to cover all the debts
The application of payments as to debts not yet due cannot be made unless:
- there is a stipulation that the debtor may so apply
2. it is made by the debtor or creditor, as the case may be, for whose benefit the period has been constituted
Rules on application of payments
- The debtor has the first choice (has to decide BEFORE the payment, not after)
- The right to make the application once exercised is irrevocable unless the creditor consents
- The debtor’s right to apply payment is not mandatory but merely directory
- If the creditor has not also made the application, or if the application is not valid, the debt, which is the most onerous to the debtor among those due, shall be deemed to have been satisfied
- If the debts due are of the same nature and burden, the payment shall be applied to all of them proportionately
- If neither party has exercised its option and there is disagreement as to debts to which payment is applied, the court will decide on it.
Payment by cession
It is the assignment or abandonment of all the properties of the debtor for the benefit of his creditors in order that the latter may sell the same and apply the proceeds thereof to the satisfaction of their credits.
Requisites of payment by cession
- There must be 2 or more creditors
- The debtor must be (partially) insolvent
- The assignment must involve all the properties of the debtor
- The cession must be accepted by the creditors
Dacion en pago v. payment by cession
(1)
dacion: usually only 1 creditor
cession: several creditors
(2)
dacion: does not presuppose the insolvency of the debtor or a situation of financial difficulties
cession: the debtor is insolvent at the time of assignment
(3)
dacion: does not involve all property of the debtor
cession: extends to all the property of the debtor subject to execution
(4)
dacion: creditor becomes the owner of the thing given by the debtor
cession: the creditors only acquire the right to sell the thing and apply the proceeds to their credits pro rata
(5)
dacion: really an act of novation
cesson: not an act of novation
- both are special forms of payment/performance
- both governed by the law on sales
Tender of payment is not necessary before the debtor can consign the thing due with the court in the following cases
- 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 2 or more persons claim the same right to collect
- When the title of the obligation has been lost
Tender of payment
The act, on the part of the debtor, of offering to the creditor the thing or amount due. The debtor must show that he has in his possession the thing or money to be delivered at the time of the offer.
Consignation
The act of depositing the thing or amount due with the proper court or judicial authorities when the creditor does not desire, or refuses to accept payment, or cannot receive it, after complying with the formalities required by law. It is necessarily judicial and it generally requires a prior tender of payment which is by its very nature extra-judicial.
Requisites of a valid consignation
- existence of a valid debt which is due
- valid prior tender of payment by the debtor and refusal without justifiable reason by the creditor to accept it
- previous notice of the consignation to persons interested in the fulfillment of the obligation
- consignation of the thing or sum due with the proper court
- subsequent notice of consignation made to the interested parties
Requirements for valid tender of payment
- Tender of payment must comply with the rules on payment
- It must be unconditional and for the whole amount
- It must be actually made
When is consignation deemed properly made?
In any of the following cases:
- When the creditor accepts the thing or sum deposited, without objection, as payment of the obligation
- When the creditor questions the validity of the consignation, and the court, after hearing, declares that it has been properly made
- When the creditor neither accepts nor questions the validity of the consignation, and the court after hearing, orders the cancellation of the obligation.
Requisites for extinguishment of obligation from loss of the thing due
- The obligation is to deliver a specific or determinate thing
- The loss of the thing occurs without the fault of the debtor
- The debtor is not guilty of delay
Cases wherein the loss of the specific thing (even in the absence of fault and delay) will not exempt the debtor from liability
- When the law so provides
- When the stipulation so provides
- When the nature of the obligation requires the assumption of risk
- When the obligation to deliver a specific thing arises from a crime
What happens when there is only a partial loss of a specific thing?
The courts will determine whether the partial loss is so important as to extinguish the obligation.
Requisites for 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.”
- The event or change in circumstance could not have been foreseen at the time of the execution of the contract
- It makes the performance of the contract extremely difficult but not impossible
- It must not be due to any act of the parties
- The contract is for a future prestation
Condonation or remission
The gratuitous renunciation by the creditor of his right against the debtor resulting in the extinguishment of the latter’s obligation in its entirety or in that part of the same to which the renunciation refers.
Requisites of condonation or remission
- It must be gratuitous
- It must be accepted by the obligor
- The parties must have capacity
- It must not be inofficious
- If made expressly, it must comply with the forms of donation
In remission, there shall be no equivalent received for the benefit given because from the moment it exists, the nature of the act is changed and becomes?
- Dation in payment, if a thing is received by the creditor instead of the amount due
- Cession, if the assignment of property is for the benefit of creditors
- Novation, if the object or circumstances of the obligation are changed
- Compromise, if what is renounced is a doubtful or litigious right in exchange of other concessions obtained by the creditor.
Kinds of remission
- As to its extent
a. complete - when it covers the entire obligation
b. partial - when it does not cover the entire obligation - As to its form
a. express - when it is made either verbally or in writing
b. implied - when it can only be inferred from conduct - As to its date of effectivity
a. inter vivos - when it will take effect during the lifetime of the donor
b. mortis causa - when it will become effective upon the death of the donor
Confusion or merger
The meeting in one person of the qualities of creditor and debtor with respect to the same obligation
Requisites of confusion
- It must take place between the principal debtor and creditor
- It must be complete and definite
Compensation
The extinguishment to the concurrent amount of the debts or obligations of 2 persons who, in their own right, are reciprocally or mutually principal debtors and creditors of each other.
Compensation v. confusion
(1)
confusion: only one person is the creditor and debtor of himself
compensation: 2 person involved, each of whom is a debtor and a creditor of the other
(2)
confusion: one obligation
compensation: 2 obligations
(3)
confusion: impossibility of payment
compensation: indirect payment
*there may be compensation in joint and solidary obligations
Compensation v. payment
(1)
compensation: takes effect by operation of law
payment: takes effect by act of the parties
(2)
compensation: it is not required that the parties have the capacity to give or to receive, as the case may b
payment: the parties must have the free disposal of the thing due and capacity to alienate it and to receive payment, as the case may be
(3)
compensation: law permits partial extinguishment of the obligation
payment: it is necessary that it be complete and indivisible
Kinds of compensation
- By its effect or extent
a. total - when both obligations are of the same amount and are entirely extinguished
b. partial - when the 2 obligations are of different amounts and a balance remains - By its cause or origin
a. Legal - when it takes place ipso jure or by operation of law
b. Conventional or voluntary - when it takes place by agreement of the parties even in the absence of some of the legal requisites
c. Judicial - order from a court in a litigation
d. Facultative - when it can be set up only be one of the parties
Requisites for legal compensation
- That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other
- 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
- That the two debts be due
- That they be liquidated and demandable
- That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor
Total compensation
When the two debts are of the same amount.
If they are of different amounts, compensation is total as regards the smaller debt, and partial only with respect to the larger debt.
Exception to the general rule that only debts which are due and demandable can be compensated
Art. 1282 or voluntary compensation expressly stipulated in contract
Instances when legal compensation not allowed by law
- Where one of the debts arises from a depositum
- Where one of the debts arises from a commodatum (a gratuitous contract whereby one of the parties delivers to another something not consumable so that the latter may use the same for a certain time and return it)
- Where one of the debts arises from a claim for support due by gratuitous title
Compensation occurs automatically by operation of law. T or F.
True.
Obligations may be modified by
- changing their object or principal conditions
- substituting the person of the debtor
- subrogating a third person in the rights of the creditor
Novation
The total or partial extinction of an obligation through the creation of a new one which substitutes it. (extinguishment to modification)
Kinds of novation
- According to origin
a. legal
b. conventional - According to how it is constituted
a. express
b. implied - According to extent or effect
a. total or extinctive
b. partial or modificatory - According to subject
a. real or objective - object is changed
b. personal or subjective - creditor or debtor changed
c. mixed
Requisites of novation
- The existence of a previous valid obligation
- The intention or agreement and capacity of the parties to extinguish or modify the obligation
- The extinguishment or modification of the obligation
- The creation or birth of a valid new obligation
- Substantial difference of the old and new obligation
Kinds of personal novation
- Substitution - when the debtor is substituted
a. Expromision (without the knowledge of original debtor but with consent of creditor)
b. Delegacion - Subrogation - when the creditor is substituted
The old debtor is not liable to the creditor in case of the insolvency of the new debtor. T or F.
False. Although this is the general rule, there are exceptions:
a. the said insolvency was already existing and of public knowledge (although unknown to old debtor) at the time of delegacion
b. the insolvency was already existing and known to the debtor (although not of public knowledge) at the time of the delegacion
Consent of all parties is required in conventional subrogation. T or F.
True.
Cases wherein legal subrogation is presumed
- When the creditor pays another creditor who is preferred, even without the debtor’s knowledge
- When a third person, not interested in the obligation, pays with the express or tacit approval of the debtor
- When, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation pays, without prejudice to the effects of confusion as to the latter’s share.
Novation
It is the substitution or change of an obligation by another, resulting in its extinguishment or modification, either by changing the object or principal conditions, or by substituting another in the place of the debtor or by subrogating a third person to the rights of the creditor
Kinds of Novation
- As to essence
a. Objective or real novation – Changing the object or principal conditions of the obligation
NOTE: In payment of sum of money, the first obligation is not novated by a second obligation that:
(1) Expressly recognizes the first obligation;
(2) Changes only the terms of payment;
(3) Adds other obligation not incompatible with the old ones; or
(4) Merely supplements the first one.
b. Subjective or personal novation – Change of the parties.
i. Substituting the person of the debtor (passive novation) – may be made without the knowledge of or against the will of the latter, but not without the consent of the creditor.
a) Delegacion – The substitution is initiated by the old debtor himself (delegante) by convincing another person (delegado) to take his place and to pay his obligation to the creditor
b) Expromission – The substitution of the old debtor by a new debtor is upon the initiative or proposal of a third person
NOTE: If it is the creditor who initiated the change of debtor, it is considered expromission
ii. Subrogating a third person to the rights of the creditor (active novation)
c. Mixed – Combination of the objective and subjective novation.
- As to form of their constitution
a. Express – The parties declared in unequivocal terms that the obligation is extinguished by the new obligation.
b. Implied – No express declaration that the old obligation is extinguished by the new one. The old and new obligation is incompatible on every material point - As to extent of their effects
a. Total or extinctive – Obligation is originally extinguished.
NOTE: Four requisites of extinctive novation:
(1) A previous valid obligation;
(2) An agreement of all parties concerned to a new contract;
(3) The extinguishment of the old obligation; and
(4) The birth of a valid new obligation
The extinctive novation would thus have the twin effects of first, extinguishing an existing obligation and second, creating a new one in its stead.
b. Partial or modificatory – Original obligation is not extinguished but merely modified.
- As to their origin
a. Legal novation – By operation of law
b. Conventional novation – By agreement of the parties - As to presence of absence of condition
a. Pure – New obligation is not subject to a condition.
b. Conditional – When the creation of the new obligation is subject to a condition.
Requisites of delegacion
- Substitution is upon the initiative or proposal of the old debtor himself by proposing to the creditor the entry of another (third person) as the new debtor who will replace him in payment of the obligation;
- The creditor accepts and the new debtor agrees to the proposal of the old debtor; and
- The old debtor is released from the obligation with the consent of the creditor.
Requisites of expromission
- Substitution is upon the initiative or proposal of a third person who will step into the shoes of the debtor;
- Creditor must give his consent to the proposal of the third person; and
- Old debtor must be released from the obligation with the consent of the creditor.
Effects of novation
- Extinguishment of principal also extinguishes the accessory, except:
a. Mortgagor, pledgor, surety or guarantor agrees to be bound by the new obligation or
b. Stipulation made in favor of a third person such as stipulation pour atrui unless beneficiary consents to the novation - If old obligation is:
a. Void – Novation is void
b. Voidable – Novation is valid provided that the annulment may be claimed only by the debtor or when ratification validates acts
c. If the old obligation was subject to a suspensive or resolutory condition, the new obligation shall be under the same condition, unless it is otherwise stipulated. - If old obligation is conditional and the new obligation is pure:
a. If resolutory and it occurred – Old obligation already extinguished; no new obligation since nothing to novate.
b. If suspensive and it did not occur – It is as if there is no obligation; thus, there is nothing to novate. - If the new obligation is:
a. Void – Original one shall subsist, unless the parties intended that the former relation should be extinguished in any event
b. Voidable – Novation can take place, except when such new obligation is annulled. In such case, old obligation shall subsist.
c. Pure obligation – Conditions of old obligation deemed attached to the new, unless otherwise stipulated
d. Conditional Obligation:
i. If resolutory – Valid until the happening of the condition
ii. If suspensive and did not materialize – No novation, old obligation is enforced
NOTE: Novation does not extinguish criminal liability
