Law on Obligation and Contracts Reviewer

CAUSES OF EXTINGUISHMENT OF OBLIGATION 1. Payment or performance 2. Loss of the thing due 3. Condonation or remission of the debt 4. Confusion or merger of rights of creditor and debtor 5. Compensation 6. Novation I – PAYMENT OR PERFORMANCE PAYMENT means not only the delivery of money but also the performance, in any other manner of an obligation. How must the payment be made? 1. There must be delivery of the thing or rendition of the service that was contemplated. a. The debtor of a thing cannot compel the creditor to accept a different one although the latter may be of the same value as, or more valuable than that which is due. . In obligation to do or not to do, an act or forbearance cannot be substituted by another act or forbearance against the creditor’s will. c. In obligation to give generic thing whose quality and circumstance 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 must be taken into consideration. d. If the obligation is a monetary obligation, the payment must be in legal tender. 2. The payment or performance must be complete. Exceptions: 1.

If the obligation has been substantially performed in good faith, the debtor may recover as though there had been complete fulfillment less damages suffered by the creditor. 2. When the creditor accepts the performance knowing its incompleteness or irregularity and without expressing any protest or objection. Who must make the payment? Payment must be made by the debtor who must possess the following: 1. the free disposal of the thing due; and – the property must not be subject of any claim by third person. 2. the capacity to alienate the thing. – debtor must not be incapable of giving consent otherwise the payment is void.

Payment by a third person The creditor is not bound to accept payment or performance by a third person EXCEPT in the following cases: 1. when there is a stipulation to that effect 2. when the third person has an interest in the fulfillment of the obligation (example: guarantor) Rights of a third person who makes the payment a. payment with knowledge and consent of the debtor 1. third person can recover what he has paid from the debtor 2. third person is entitled to be subrogated in the rights of the creditor b. payment without the knowledge or against the will of the debtor 1. e can recover only insofar as the payment has been beneficial to the debtor 2. he is not entitled to subrogation Payment by a third person who does not want to be reimbursed -The payment shall be deemed to be donation which requires the debtor’s consent. To whom shall payment be made? 1. to the creditor 2. to the creditor’s successors in interest 3. to any person authorized to receive payment Payment to an unauthorized third person General Rule: Not valid Exceptions: 1. Payment has redounded to the benefit of the creditor; 2. Payment is made in good faith to a third person in possession of the credit. Where payment must be made? 1.

If there is a stipulation, then in the place designated. 2. If there is no stipulation a. to give determinate thing – wherever the thing must be at the time the obligation was constituted. b. to give generic thing or an obligation to do – domicile of the debtor Special forms of payment 1. Dation in payment (Dacion en pago) – it is a special form of payment where

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the ownership of a property belonging to the debtor is transferred to his creditor to a debt in money. 2. Application of payment – it is the designation of the debt to which payment shall be applied when the debtor owes several debts in favor of the same creditor. Procedure: . the debtor is given the preferential right to apply the payment designates the debt to be paid. 2. if the debtor does not make the designation, the creditor makes it by indicating the debt being paid in his receipt. 3. if neither the debtor nor the creditor makes the designation or application: a. payment shall be applied to the debt which is the most onerous b. if the debts are the same – to all debts proportionately 3. Payment by cession – it is the abandonment or assignment by the debtor of all his property in favor of his creditors so that the latter may sell them and recover their claims out of the proceeds. Requisites: . there must be two or more creditors; 2. the debtor is insolvent; 3. the debtor abandons all his properties 4. the creditors accept the abandonment Note: The cession or assignment operates only to authorize the creditors to sell the debtor’s property, hence, ownership is not transferred to them. 4. Tender of payment and consignation Tender of payment is the act of the debtor of offering to his creditor what is due him. Consignation is the act of depositing the sum or thing due with the judicial authorities whenever the creditor refuses without just cause to accept the same, or in the cases when the creditor cannot accept it.

Effect of consignation duly made -The debtor may ask the judge to order the cancellation of the obligation. The obligation shall be extinguished after the creditor has accepted the consignation or the judge has declared that the consignation has been properly made. When consignation, without a previous tender of payment, will produce the same effect: 1. the creditor is absent or unknown or does not appear at the place of payment. 2. the creditor is incapacitated to receive the payment at the time it is due. 3. when, without just cause, he refuses to give receipt. 4. two or more persons claim the same right to collect.

II – LOSS OF THE THING DUE A. Concept 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 cannot be recovered. B. Effect on the obligation 1. Loss of a determinate thing General Rule: obligation is extinguished. Exceptions: a. when the loss is due to the fault of the debtor. b. when the debtor has incurred in delay. c. when so provided by law. (ex. The debtor promised to deliver the same thing to two or more persons who do not have the same interest. ) d. when it is stipulated by the parties. e. hen the nature of the obligation requires the assumption of risk. 2. Loss of a generic thing – the loss of destruction of anything of the same kind does not extinguished the obligation. C. Creditor’s right if the loss is caused by a third person – if the obligation has 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. III – CONDONATION OR REMISSION OF DEBT A. Concept 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, it requires the debtor’s consent. B. Kinds of condonation or remission 1. as to the amount or extent a. Total – when the total obligation is remitted. b. Partial – when only part of the obligation, or only the accessory obligation is remitted. 2. as to form a. Express – one made orally or in writing. b. Implied – one inferred from the conduct of the parties. C. Effect of condonation or remission 1. The remission of the principal debt extinguishes the accessory obligation. 2. the remission of the accessory obligation does not carry with it that of the principal debt. IV – CONFUSION OR MERGER A. Concept

Confusion or merger is the meeting in one person the qualities or the character of creditor and debtor. B. Effect of merger when there is guarantor 1. Merger which takes place in the principal debtor or creditor benefits the guarantors. Both the principal obligation and the guaranty are extinguished. 2. Merger which takes place in the person of the guarantor does not extinguish the obligation, only the guaranty is extinguished. V- COMPENSATION A. Concept Compensation is a mode of extinguishing an obligation when two persons, in their own right, are debtors and creditors of each other. B. Kinds of compensation 1. as to amount or extent a.

Total – when the debts are of the same amount. b. Partial – when the debts are of different amount. 2. as to cause or origin a. legal – it takes place by operation of law and extinguishes both debts to the concurrent amount even though the debts are payable at different places and the creditors and debtors are not aware of the compensation. Requisites: 1. That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other. 2. 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 are due. 4. That both debts be liquidated and demandable b. Voluntary or conventional redemption – takes place by agreement of the parties, such as when they agree to the compensation of debts which are not yet due. c. Judicial – compensation ordered by the court. d. Facultative – compensation that may be claimed or opposed by one of the parties (such as when not all the requisites for legal compensation cannot take place) VI – NOVATION A. Concept It is the modification or extinguishment of an obligation by another, either by: a. changing the object or principal condition; b. ubstituting the person of the debtor; or c. subrogating a third person in the rights of the creditor. B. Requisites of novation 1. there must be a previous valid obligation. 2. there must be an agreement between the parties to modify or extinguish the obligation. 3. the extinguishment of the old obligation. 4. the validity of the new obligation. C. Kinds of novation 1. as to object or purpose a. Real or objective – novation by changing the object or principal condition. b. Personal or subjective – novation by change of the parties (debtor or creditor). a) substituting the person of the debtor (always with the creditor’s consent) 1.

Expromision – third person initiates the substitution and assumes the obligation even without the knowledge or against the will of the debtor) 2. Delegacion – debtor initiates the substitution, which requires the consent of all parties (original debtor, creditor and new debtor) b) Subrogating a third person in the rights of the creditor. Kinds of Subrogation 1. Conventional subrogation – change of creditor by the agreement of the parties. 2. Legal subrogation – subrogation by operation of law. 3. Mixed subrogation – change of object and parties to the obligation. 2. as to form a.

Express – novation declared in unequivocal terms. b. Implied – when the old and new obligation are on every point incompatible with each other. 3. as to extent a. Total – the old obligation is totally extinguished. b. Partial – the old obligation still remains in force except as it has been modified. D. Effect if new obligation is void If the new obligation is void, the novation is void. In such case, the original one shall subsist. E. Effect if original obligation is void The novation is void if the original obligation is void. If the original obligation is void, there is no obligation to extinguish since it is non-existent.

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