NOTES ON EXTINGUISHMENT OF OBLIGATIONS ATTY.

RF LIM, CPA
ACCL101: LAW ON OBLIGATIONS AND CONTRACTS
PAYMENT

1. Application of Payments – It is the designation of the debt to which the payment

must be applied when the debtor has several obligations of the same kind in favor
the same creditor.
a. Requisites:
i. There is only one debtor and creditor;
ii. The debtor owes the creditor two or more debts;
iii. Debts are of the same kind or identical in nature;
iv. All debts are due and demandable, except:
1. When there is mutual agreement between the parties;
2. The application is made by the party for whose benefit the
term has been constituted.
v. The payment made is not sufficient to cover all obligations.

b. Right of the debtor in the application of payments:

i. General rule: The law grants the debtor a preferential right to choose
the debt to which his payment is to be applied. But the right of the
debtor is not absolute; he cannot impair the rights granted by law to
the creditor.
ii. Exception: Debtor’s failure to ascertain which debt his payment is to
be applied – the right of the debtor to choose which debt his payment
will be applied against may be transferred to the creditor when he
fails to make the applications, and subsequently, he accepts a
receipts from the creditor evidencing the latter’s choice of
application. Under this circumstance, the debtor cannot complain of
the application made by the creditor unless there be a cause for
invalidating such act.
iii. Limitation upon right to apply payment:
1. If the debt produces interests, payment of the principal shall
not be deemed to have been made until the interest has been
covered.
iv. Rules on legal application of payment – legal application of payment
takes effect when the debtor and the creditor failed to exercise the
right of application of payment.
1. The rule is that the payment should be applied to the more
ONEROUS debts:
a. When a person is bound as principal in one obligation
and as a surety in another, the former is more onerous;
NOTES ON EXTINGUISHMENT OF OBLIGATIONS ATTY. RF LIM, CPA
ACCL101: LAW ON OBLIGATIONS AND CONTRACTS
b. When there are various debts, the oldest ones are more
burdensome;
c. Where one bears interest and the other does not, even
if the latter is the older obligation, the former is
considered more onerous;
d. Where there is an encumbrance, the debt with a
guaranty is more onerous than that without security;
e. With respect to indemnity for damages, the debt which
is subject to the general rules on dames is less
burdensome than that in which there is a penal clause;
f. The liquidated debt is more burdensome than the
unliquidated damages;
g. An obligation in which the debtor is in default is more
onerous than one which he is not.
v. Effect of creditor’s refusal to:
1. If the debtor makes a proper application of payment, but the
creditor refuses to accept it because he wants to apply it to
another debt, such creditor will incur in delay.

2. Payment by Cession – Assignment or cession is the abandonment of the

universality of the property of the debtor for the benefit of his creditors in order
that such property may be applied to the payment of the credits.
a. Requisites of payment by cession:
i. Plurality of debts; (one debtor and two or more creditors)
ii. Partial or relative insolvency of the debtor;
iii. Acceptance of the cession by the creditors.
b. Extent of extinguishment of obligation:
i. It merely releases the debtor for the net proceeds of the things ceded
or assigned, unless there is a contrary intention.

3. Tender of Payment and Consignation

a. Tender of Payment – the definitive act of offering to the creditor what is
due to him together with the demand that the creditor accepts the same.
b. Consignation – the act of depositing the object of the obligation with the
court or competent authority after the creditor has unjustifiably refused to
accept the same or is not in a position to accept it due to certain reasons or
circumstances.
i. Requisites of consignation:
1. There was a debt;
NOTES ON EXTINGUISHMENT OF OBLIGATIONS ATTY. RF LIM, CPA
ACCL101: LAW ON OBLIGATIONS AND CONTRACTS
2. The consignation of due obligation was made because of
some legal cause provided under Article 1256 of the New
Civil Code;
3. The previous notice of the consignation had been given to the
person interested in the performance of the obligation;
4. The amount or thing due was placed at the disposal of the
court;
5. That after the consignation had been made, the persons
interested were notified thereof.
c. Effectivity of consignation as payment:
i. GR: Consignation shall produce effects of payment only if there is a
valid tender of payment.
ii. Exception: It shall, however, not produce the same effect in the
following cases:
1. Creditor is absent or unknown, or does not appear at the place
of payment;
2. Creditor refuses to issue a receipt without just cause;
3. Title of the obligation has been lost;
4. Creditor is incapacitated to receive payment at the time it is
due; or
5. Two or more persons claim the right to collect.
iii. Right of the debtor to withdraw the thing deposited:
1. 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.
a. Note: 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.

4. CONDONATION OR REMISSION OF DEBT – An act of liberality by virtue of

which the creditor, without receiving any price or equivalent, renounces the
enforcement of the obligation, as a result of which it is extinguished in its entirety
or in that part or aspect of the same to which the condonation or remission refers.
a. Requisites of condonation:
i. Must be gratuitous;
ii. Acceptance by the debtor
iii. Must not be inofficious;
NOTES ON EXTINGUISHMENT OF OBLIGATIONS ATTY. RF LIM, CPA
ACCL101: LAW ON OBLIGATIONS AND CONTRACTS
iv. Formalities provided by law on Donations must be complied with if
donation is express;
v. An existing demandable debt at the time the remission is made.
b. Manner and kinds of remission:
i. Total – remission of the whole obligation;
ii. Partial – remission of the part of the obligation;
iii. Inter vivos – effective during the lifetime of the creditor;
iv. Mortis causa – Effective upon death of the creditor. In this case, the
remission must be contained in a will or testament.
v. Express – When it is made formally, it should be in accordance with
the forms of ordinary donations with regard to acceptance, amount
and revocation; and
vi. Implied – when it can be inferred from the acts of the parties.
c. Effect of delivery of evidence of credit to debtor
i. If the creditor voluntarily delivers the private document evidencing
the credit to the debtor, there is a prima facie presumption that he
renounces his right of action against the latter for the collection of
the said credit.
d. Effect if remission in general:
i. It extinguishes the obligation in its entirety or in the part or aspect
thereof to which the remission refers.
e. Effect of the remission of the principal debt with respect to the accessory
obligation and vice versa.
i. The renunciation of the principal debt shall extinguish the accessory,
but the waiver of the latter shall leave the former in force.
ii. It is presumed that the accessory obligation of pledge has been
remitted when the thing pledged, after its delivery to the creditor, is
found in the possession of the debtor, or of a third person who owns
the thing.
f. Effect of inofficious donation:
i. It may be totally revoked or reduced depending on whether or not it
is totally or only partly onofficious.
ii. The obligation remitted is considered inofficious if it impairs the
legitime of the compulsory heirs.
g. Acceptance by the debtor
i. The acceptance by the debtor is required. There can be no unilateral
condonation. This is because condonation is an act of liberality. It is
a donation of an existing credit, considered a property right, in favor
of the debtor, it is required that the debtor gives his consent thereto
NOTES ON EXTINGUISHMENT OF OBLIGATIONS ATTY. RF LIM, CPA
ACCL101: LAW ON OBLIGATIONS AND CONTRACTS
by making an acceptance. If there is no acceptance, there is no
condonation.

5. CONFUSION OR MERGER OF RIGHTS - There is confusion when there is a

meeting in one person of the qualities of a creditor and debtor of the same
obligation.
a. Requisites of confusion or merger of rights
i. It must take place between the creditor and the principal debtor;
ii. The very same obligation must be involved (for if the debtor acquires
rights from the creditor, but not the particular obligation in question,
there will be no merger)
iii. The confusion must be total or as regards with the entire obligation.
b. Effect of confusion or merger of rights
i. The creditor and debtor become the same person involving the same
obligation. Hence, the obligation is extinguished.
c. Can there be partial confusion?
i. Yes, it will be definite and complete up to the extent of the concurrent
amounts or value, but the remaining obligation subsists.
d. Effect of confusion or merger in relation to the guarantors.
i. The merger which takes place in the person of the principal creditor
benefits the guarantors. The contract of guaranty is extinguished;
ii. Confusion which takes place in the person of any of the guarantors
does not extinguish the obligation.
e. Effect of confusion or merger in one debtor or creditor in a joint obligation.
i. General Rule: Joint obligation is not extinguished since confusion is
not definite and complete with regard to the entire obligation. A part
of the obligation still remains outstanding.
ii. Exception: Obligation is extinguished with respect only to the share
corresponding to the debtor or creditor concerned. In effect, there is
only partial extinguishment of the entire obligation.
f. Effect of confusion or merger in one debtor or creditor in a solidary
obligation
i. If a solidary debtor had paid the entire obligation, the obligation is
totally extinguished without prejudice to the rights of the solidary
debtor who paid, to proceed against his solidary co-debtors for the
latter’s individual contribution or liability.
g. Revocation of confusion or merger of rights
i. If the act which created the confusion is revoked for some causes
such as rescission of contracts or nullity of the will or contract, the
NOTES ON EXTINGUISHMENT OF OBLIGATIONS ATTY. RF LIM, CPA
ACCL101: LAW ON OBLIGATIONS AND CONTRACTS
confusion or merger is also revoked. The subject obligation is
revived in the same condition as it was before the confusion.

6. COMPENSATION – It is a mode of extinguishing obligations that take place when

two persons, in their own right, are creditors and debtors of each other. It is the
offsetting of the respective obligation of two persons who stand as principal
creditors and debtors of each other, with the effect of extinguishing their
obligations to their concurrent amount.
a. Requisites of compensation:
i. Each one of the obligors must be bound principally, and that he be
at the same time a principal creditor of the other except guarantor
who may set up compensation as regards what the creditor may owe
the principal.
ii. Both debts consist in 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 stipulated.
iii. Both debts are due and demandable
iv. Both debts are liquidated
v. Neither debt must be retained in a controversy commenced by third
person and communicated in due time to the debtor; and
vi. Compensation must not be prohibited by law.
Note: If all these requisites are present, compensation takes effect by
operation of law, and extinguishes both debts to the concurrent amount,
even though the creditors and debtors are not aware of the compensation.
b. Effect of Compensation:
i. Both debts are extinguished
ii. Interests stop accruing on the extinguished obligation or the part
extinguished;
iii. The period of prescription stops with respect to the obligation or part
extinguished; and
iv. All accessory obligations of the principal obligation which has been
extinguished are also extinguished.
c. Kinds of Compensation
i. Legal – by operation of law; (please see note above)
ii. Conventional – by agreement of the parties;
1. General Rule: the mutual debts must be both due;
2. Exception: The parties may agree that their mutual debts are
compensated even if the same are not yet due.
iii. Judicial – by judgment of the court when there is a counterclaim duly
pleaded, and the compensation decreed;
NOTES ON EXTINGUISHMENT OF OBLIGATIONS ATTY. RF LIM, CPA
ACCL101: LAW ON OBLIGATIONS AND CONTRACTS
iv. Facultative – may be claimed or opposed by one of the parties.

7. 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.
a. Requisites:
i. Valid old obligation;
ii. Intent to extinguish or to modify the old obligation;
iii. Capacity and consent of all the parties to the new obligation;
iv. Substantial difference of the old and new obligation – on every point
incompatible with each other (implied novation); and
v. Valid new obligation
Note: Subsequent valid new obligation – a subsequent void
obligation intended to novate an old one has no legal effect and is
considered as if the parties have not agreed upon it in the first place.
Hence, the old original obligation shall subsist.

However, if in coming up with the new but void obligation, parties

agree that it shall in any way extinguish the old obligation, such old
obligation will not be revived.
b. Presumption of Novation -> Novation IS NEVER PRESUMED, it must be
proven as a fact either by:
i. Explicit declaration – if it be so declared in unequivocal (crystal clear)
terms; or
ii. Material incompatibility – that the old obligation and the new
obligations be on every point incompatible with each other.
c. Express Novation – takes place only when the intention to effect a novation
clearly results by a full discharge of the original debt.
d. Implied Novation – it is imperative that the old and new obligations must
be incompatible with each other. The test of incompatibility between the
old and the new obligations is to determine whether or not both of them
can stand together, each having its own independence. If they can stand
together, there is no incompatibility; consequently, there is no
incompatibility novation. If they cannot stand together, there is
incompatibility; consequently, there is novation.
e. Two-fold function of novation
i. It extinguishes the old obligation; and
ii. It creates a new obligation in lieu of the old one.
f. Kinds of Novation:
NOTES ON EXTINGUISHMENT OF OBLIGATIONS ATTY. RF LIM, CPA
ACCL101: LAW ON OBLIGATIONS AND CONTRACTS
i. As to essence:
1. Objective or real novation – changing the object or principal
conditions of the obligations.
2. Subjective or personal novation – change of the parties.
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.
i. Insolvency of the new debtor in Delegacion:
1. General rule: insolvency of the new
debtor shall not revive the obligation of
the old debtor.
2. Exception:
a. The insolvency was already
existing and of public knowledge,
or known to the debtor;
b. Insolvency of the new debtor was
already existing and known to the
original debtor at the time of the
delegation of the debt to the new
debtor.
c. Note: In both cases above, the
creditor must NOT know that the
new debtor is insolvent;
otherwise, the creditor would be
considered estopped.

In both cases above, the

insolvency must have existed at
the time the old debtor delegated
his debt.

b. Expromission – the substitution of the old debtor by a

new debtor is upon the initiative or proposal of a third
person or of the creditor.
i. Inolvency of the new debtor in Expromission:
1. If substitution is without the knowledge
or against the will of the debtor, the new
debtor’s insolvency or non-fulfillment of
NOTES ON EXTINGUISHMENT OF OBLIGATIONS ATTY. RF LIM, CPA
ACCL101: LAW ON OBLIGATIONS AND CONTRACTS
the obligation shall not give rise to any
liability on the part of the original debtor.
2. Note: If the old debtor gave his consent
and the new debtor could not fulfill the
obligation, the old debtor should be
liable for the payment of his original
obligation.
c. Subrogating a third person to the rights of the creditor.

3. Mixed – combination of the objective and subjective novation.

g. Rights of the new debtor

i. With the debtor’s consent – right of reimbursement and subrogation
ii. Without the consent of the old debtor or against his will – right to
beneficial reimbursement.
h. Effects of Novation
i. Extinguishment of the principal also extinguishes the accessory,
except:
1. Mortgagor, pledger, surety or guarantor agrees to be bound
by the new obligation;
2. Stipulation made in favor of a third person such as stipulation
pour atrui, unless beneficiary consents to the novation.
ii. If old obligation is:
1. Void – novation is void.
2. Voidable – Novation is valid provided that the annulment
may be claimed only by the debtor or when the ratification
validates acts.
3. Was subject to a suspensive or resolutory condition, the new
obligation shall be under the same condition, unless it is
otherwise stipulated.
iii. If the old obligation is conditional and the new obligation is pure:
1. If resolutory and it occurred – old obligation already
extinguished, no new obligation since nothing to novate.
2. If suspensive and it did not occur – it is as if there is no
obligation; thus, there is nothing to novate.
iv. If the new obligation is:
1. Void – original one shall subsist, unless the parties intended
that the former relation should be extinguished in any event.
NOTES ON EXTINGUISHMENT OF OBLIGATIONS ATTY. RF LIM, CPA
ACCL101: LAW ON OBLIGATIONS AND CONTRACTS
2. Voidable – novation can take place, except when such new
obligation is annulled. In such case, the old obligation shall
subsist.
3. Pure obligation: conditions of old obligation deemed attached
to the new, unless otherwise stipulated.
4. Conditional obligation:
a. If resolutory – valid until the happening of the
condition.
b. If suspensive and did not materialize – no novation,
old obligation is enforced.
c. Note: Novation does not extinguish criminal liability.
i. Subrogation – it is the active subjective novation characterized by the
transfer to a third person of all the rights appertaining to the creditor in the
transaction concerned including the right to proceed against the guarantors
or possessors of mortgages and similar others subject to any applicable legal
provision or any stipulation agreed upon by parties in conventional
subrogation. Note: Whoever pays on behalf of the debtor without the
knowledge or against the will of the latter cannot compel the creditor to
subrogate him in his rights, such as those arising from a mortgage,
guaranty, or penalty.
i. Kinds:
1. Legal subrogation – constituted by virtue of a law and does
not proceed from an agreement of the parties;
2. Voluntary or conventional subrogation – created by the
parties by their voluntary agreement.
3. Total subrogation – rights of the creditor are totally
transferred to the third person
4. Partial subrogation – only part of the rights of the creditor is
transferred to the third person.
j. Presumption of legal subrogation.
i. General rule: legal subrogation is not presumed.
ii. Exception:
1. When a creditor pays another creditor who is preferred, even
without the debtor’s knowledge;
2. When a third person, not interested in the obligation, pays
with the express or tacit approval of the debtor;
3. 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.