LAW 1: MODULE 3
Republic of the Philippines
University of Rizal System
Province of Rizal
www.urs.edu..ph
Email Address: ursmain@urs.edu.ph
Business and Industry
Law 1: Business Law
First Semester, Schoolyear 2020-2021
MODULE 6: Modes of Extinguishing an Obligation
Introduction
An obligation once created shall persist until it is properly extinguished by any
modes provided by law. These modes of extinguishment ranges from voluntary acts of
parties or by operation of law. Certain modes of extinguishment applies only to specific
kinds of obligations and their effect may range from partial extinguishment to total
extinguishment of obligation.
Module Objectives
A. To discuss how each mode of extinguishing obligations apply.
B. To distinguish each mode of extinguishing obligations from one another.
C. To analyze the different legal requirements for the application of each mode of
extinguishing obligations.
D. To understand the effect of each mode of extinguishing obligations.
Discussion
MODES OF EXTINGUISHING OBLIGATIONS
An obligation can be created as provided by law; similarly, it can also be
extinguished under the modes provided by law. The New Civil Code of the Philippines
enumerates the modes of extinguishing obligations:
Article 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.
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Other causes of extinguishment of obligations, such as annulment,
rescission, fulfillment of a resolutory condition, and prescription, are
governed elsewhere in this Code. (1156a)
Though the list may seem exhaustive, the Civil Code nevertheless provides for
other modes of extinguishment not included in Art. 1231. Other modes of extinguishing
obligations include:
1. Death – in case of purely personal obligations
2. Compromise
3. Mutual Desistance
4. Unilateral Withdrawal
PAYMENT OF DEBTS OF MONEY
Payment means not only the delivery of money but also the performance, in any
other manner, of an obligation. (Article 1232)
The party who claims that payment has been made must prove that fact. It leads to
the general practice of issuing receipts as evidence of payment. Payment to be valid must
conform with the following:
1. It must be complete and regular
2. It must be tendered by the proper party
3. It must be made to the proper party
4. The payor and the payee must be capacitated
5. There must be identity, in that the very thing or service due must be delivered or
released
6. It must be tendered in the proper place
MERCANTILE DOCUMENTS AS MEANS OF PAYMENT
As a general rule, a negotiable instrument or document is not a legal tender,
however, it may constitute a valid payment if it had been encashed in case of checks or
in case of a document, when it had been impaired through the fault of the creditor.
Legal Tender
The term legal tender pertains to all coins and bills issued by a government for the
payment of debts, whether public or private. In the Philippines, the Philippine Peso is
considered a legal tender but only covers coins and bills which are currently in circulation.
A creditor cannot be forced to accept any money except legal tender.
With regards to coins, it is considered legal tender under the following
circumstances:
1. Only up to a maximum amount of P1,000.00 for coins with the denomination
of P1, P5, and P10.
2. Only up to a maximum amount of P100.00 for coins with the denomination
of 1 centavo, 5 centavo, 10 centavo and 25 centavo.
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SPECIAL FORMS OR MODES OF PAYMENT
1. Dacion en pago – it occurs when the debtor transfers ownership of a property to
the creditor in satisfaction of an obligation. Note that in this particular situation, the
original obligation does not include such a transfer of ownership, it is normally
effected when the debtor fails to pay or perform his/her obligation. It should not be
confused with an obligation with a security where a property is merely offered as a
form of security to a principal obligation and not as a form of payment.
Example: Roger borrowed money from Selena. When the due date came, Roger
failed to pay for his indebtedness so he gave Selena hi celfone instead. There is a
dacion en pago in this case because the original obligation did not contemplate the
transfer of ownership between Roger and Selena. The transfer of ownership was
only done after Roger failed to fulfill his obligation.
2. Application of payments – it is the designation of the obligation for which payment
was to be made by a debtor. This occurs when the debtor has two or more
obligations in favor of the creditor and the payment was not sufficient to answer for
all obligations. The general rule in such a situation is that the debtor has the right
to choose which obligation the payment is supposed to apply. However, if the
debtor accepts a receipt from a creditor signifying that the creditor applied the
payment to a certain indebtedness, the debtor cannot later on contest such an
application of payment. Furthermore, should the creditor and debtor fails to specify
which obligation the payment is to be applied, then it will be applied to the most
onerous obligation. Should the obligation produces interest, the payment should be
applied to the interest first before the capital.
3. Payment by cession – it refers to the abandonment of the totality of the property
of the debtor in favor of the creditors to satisfy the obligation of the debtor. However
only the possession of the property is transferred to the creditors and not the
ownership. The creditors are free to derive benefits from the property to satisfy their
claim against the debtor.
4. Consignation – it is the practice of depositing the payment due to a creditor to a
court or judicial authority when the creditor was unable or refused to accept such
payment. This requires that the debtor has attempted to tender payment to the
creditor but the latter is unable to receive it for some reason or unjustly refuses to
accept it. In order for the debtor to be absolved of his/her obligation, the debtor may
deposit the amount to a court as his act of payment or performance. The debtor
after depositing the payment to the court is deemed to have fulfilled his/her
obligation and shall not be liable for default or delay assuming that the consignation
was made before the obligation became due.
LOSS OF THE THING DUE
A thing is considered loss if it perished, it went out of commerce, disappeared and
its existence is unknown or it cannot simply be recovered.
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Article 1189. When the conditions have been imposed with the intention of
suspending the efficacy of an obligation to give, the following rules shall be
observed in case of the improvement, loss or deterioration of the thing
during the pendency of the condition:
XXX
(2) If the thing is lost through the fault of the debtor, he shall be obliged to
pay damages; it is understood that the thing is lost when it perishes, or
goes out of commerce, or disappears in such a way that its existence is
unknown or it cannot be recovered;
XXX
Loss of the thing due will only extinguish an obligation if it involves the delivery of
a determinate object. Thus, if the object to be delivered is a generic thing, then the loss of
such an object will not extinguish the obligation. Since a determinate or specific object is
considered “unique” or one of a kind, its lost would mean that it is impossible to perform
the obligation. On the other hand, if the object to be delivered is a generic object, then
should the object be lost, the debtor could just deliver an object similar to the thing lost.
However, for this mode of extinguishing an obligation to apply, the loss must be without
the fault of the debtor and before he has incurred in delay.
Article 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 for fortuitous events,
the loss of the thing 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. (1182a)
Example: Tony had a koi fish which is totally white and with blue eyes. Steve offered to
purchase the fish from Tony for a big amount of money. Before Tony was able to deliver
the fish, it died in its fish pond. Since there is no other fish like it, Tony’s obligation to
deliver the fish to Steve is distinguished.
Bruce was a cattle breeder, he has a good number of cows in his ranch. Natasha
offered to buy one from Bruce. When Bruce was about to transport one of the cows, it
suddenly went wild and ran across the street. Unfortunately, it was hit by a passing truck
and died. Since there are still other cows which are similar to the cow that was supposed
to be delivered, Bruce is still obligated to deliver to Natasha a cow.
REMISSION OR CONDONATION, CONFUSION, COMPENSATION AND
NOVATION
Condonation
The gratuitous renunciation by the creditor of his right to enforce the obligation
which must be accepted by the debtor. It is similar to a donation in that it does not require
any reciprocal obligation from the recipient. Much like a donation, a condonation must
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conform with the requisites of a valid donation such as the requirement that the
condonation must be accepted by the debtor for it to be valid.
Article 1270. Condonation or remission is essentially gratuitous, and
requires the acceptance by the obligor. It may be made expressly or
impliedly.
One and the other kind shall be subject to the rules which govern inofficious
donations. Express condonation shall, furthermore, comply with the forms
of donation. (1187)
Confusion
It occurs when the rights of the creditors and the obligations of the debtor are
merged into one person. When confusion exists, the person who is obliged to fulfil the
obligation is also the person who may demand the fulfilment of the obligation, in short, the
creditor and the debtor are one and the same. The obligation is deemed to be extinguished
since it would be absurd for a person to demand the fulfilment of an obligation from
him/herself.
Consider the Following Situation
Luffy borrowed P10,000 from Nami to buy a new sail for his boat. To secure the
obligation, Luffy issued a promissory note to Nami representing the amount he
borrowed. Nami later on bought new clothes from Robin worth P10,000 but paid using
the promissory note of Luffy. Robin then went to Japan aboard Luffy’s boat. She paid
her fare using the Luffy’s promissory note. Luffy is now the holder of the promissory
note that he originally issued to Nami. Based on the promissory note, Luffy is obliged
to pay the holder of the note P10,000 which in this case is himself, since it is absurd to
pay himself, the obligation is deemed extinguished.
Compensation
Compensation occurs when the obligation of one offsets the obligation of the other.
This is possible when both parties to the obligations are mutually obliged to one another.
Kinds of Compensation
1. Legal – compensation that occurs when all the requisites provided by law are
present.
2. Conventional or Voluntary – happens when both parties agree that their obligations
to one another are extinguished.
3. Judicial – it exists upon the order of the court or by judicial decree.
Novation
When there is a substitution or modification of the original agreement, the original
agreement is deemed to be extinguished or modified. For novation to exist, there must be
an original obligation and a subsequent obligation that is not entirely similar as the
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previous one. Thus, if there is only a reiteration of the original obligation, then there is no
novation.
Kinds of Novation
1. Extinctive
In extinctive novation, the original obligation is terminated by the creation of the
subsequent obligation. The terms of the original and subsequent obligations must
be so that they cannot exist together. In this kind of novation there is a change in
the principal conditions of the obligation such as the parties or the prestation.
Extinctive novation effectively extinguishes the old obligation.
Example: Lucy contracted Grey to paint her portrait. Later on, Grey injured his
hands so he can no longer paint. He asked Lucy if Natsu can paint her portrait
instead. Lucy agreed. In this case, there is an extinctive novation since the
subsequent agreement effectively extinguishes the obligation between Grey and
Lucy while creating a new obligation between Natsu and Lucy.
2. Modificatory
There is a modificatory novation when the provisions of the original obligation can
subsist together with the subsequent obligation. There is no replacement of
essential conditions of the obligation but merely an addition or supplement to it.
Example: Gildarts borrowed money from Mirajane. They agreed that Gildarts must
pay his debt before the end of the month. However, Gildarts was not able to procure
any money on time so he asked Mirajane to give him one week extension. Mirajane
agreed. In this case, there is only a modificatory novation. The original obligation
still subsists, (Gildarts is still obliged to pay Mirajane) but what the subsequent
agreement only did is to adjust the due date of the obligation.
EFFECT OF INSOLVENCY AND BANKRUPTCY ON EXTINGUISHMENT OF
OBLIGATION
In case the debtor do not have sufficient liquid assets to pay for his/her obligations,
the debtor may seek a suspension of payment or voluntary or involuntary liquidation of his
or her assets. When the debtor files for suspension of payment, creditors cannot sue or
institute claims against the debtor with a few exceptions provided in Sec. of RA 10142 or
the Financial Rehabilitation and Insolvency Act (FRIA) of 2010.
Section 94. Petition. - An individual debtor who, possessing sufficient
property to cover all his debts but foreseeing the impossibility of meeting
them when they respectively fall due, may file a verified petition that he be
declared in the state of suspension of payments by the court of the province
or city in which he has resides for six (6) months prior to the filing of his
petition. He shall attach to his petition, as a minimum: (a) a schedule of
debts and liabilities; (b) an inventory of assets; and (c) a proposed
agreement with his creditors.
Section 96. Actions Suspended. - Upon motion filed by the individual
debtor, the court may issue an order suspending any pending execution
against the individual debtor. Provide, That properties held as security by
secured creditors shall not be the subject of such suspension order. The
suspension order shall lapse when three (3) months shall have passed
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without the proposed agreement being accepted by the creditors or as soon
as such agreement is denied.
No creditor shall sue or institute proceedings to collect his claim from the
debtor from the time of the filing of the petition for suspension of payments
and for as long as proceedings remain pending except:
(a) those creditors having claims for personal labor, maintenance, expense
of last illness and funeral of the wife or children of the debtor incurred in the
sixty (60) days immediately prior to the filing of the petition; and
(b) secured creditors.
If the debtor choose to file for a voluntary liquidation or the creditors file for an
involuntary liquidation, all the assets of the debtor will be put under the custody of the
court for the proper disposition in order to pay his liabilities. If the court deems it proper,
the properties under the custody of the court may be subjected to an execution sale and
the proceeds used to pay for the debtor’s obligations.
Section 110. Sale Under Execution. - If, in any case, proper affidavits and
bonds are presented to the court or a judge thereof, asking for and
obtaining an Order of publication and an Order for the custody of the
property of the individual debtor and thereafter the petitioners shall make it
appear satisfactorily to the court or a judge thereof that the interest of the
parties to the proceedings will be subserved by a sale thereof, the court
may order such property to be sold in the same manner as property is sold
under execution, the proceeds to de deposited in the court to abide by the
result of the proceedings.
Activity
For supplemental discussion of the topic, please check the links below:
https://www.youtube.com/watch?v=ru_O51ow1es
https://www.youtube.com/watch?v=StTsp3UU0RE
https://www.youtube.com/watch?v=-RnfFMXwWHI
Exercise
Choose a story from the following and identify 3 obligations that exists in the story and the
mode of extinguishment applied to said obligations. Explain each of your answer using
the provisions of the law.
a. Aladdin
b. Beauty and the Beast
c. Cinderella
d. Little Mermaid
e. Frozen
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Rubrics for grading the essay:
5 3 1
Completion All of the relevantSome of the The information
information were
relevant information stated were not
clearly stated. were stated. relevant to the topic.
Organization The arguments are Some of the The arguments are
organized clearly arguments are not organized.
organized
Reasoning All the arguments Some of the The arguments
have logical basis arguments have have no logical
logical basis basis
Assessment
Identification: Identify the mode of extinguishing an obligation referred to by the
following:
1. A creditor forgives the indebtedness of his debtor.
2. Albert and Ben are mutual creditors and debtors of one another, they decided not
to collect from each other.
3. After the parties agreed on the terms of the obligation, the creditor replaced the
debtor to another.
4. A delivery man delivered the package to the recipient.
5. The Louvre Museum sold the painting of Mona Lisa to a rich collector, but it
burned down before it was delivered.
6. Albert acquired the rights of Ben who is the creditor of Albert.
7. Albert paid his indebtedness to Ben.
8. Albert informed Ben that he will no longer collect Ben’s debts.
9. Ben decided to extend the due date of Albert’s indebtedness.
10. Albert purchased the hat that Jose Rizal wore in his execution, but it was stolen
on the night before its delivery.
Reflection
Can an obligation be extinguished due to the enactment of a law? Explain.
Resources and Additional Resources
1. De Leon Hector S. and De Leon Jr, Hector M. (2014). The Law on Obligations
and Contracts. Rex Book Store.
2. Baviera, A. (2008). Civil Law Review: A Centennial Contribution to Legal
Education. Quezon City: UP Law Complex, Information and Publication
Division.
3. New Civil Code of the Philippines
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4. Republic Act No. 10142 Financial Rehabilitation and Insolvency Act (FRIA) of
2010
5. Saguinsin, Artemio T. (2009). Elements of Obligations and Contracts. National
Book Store.
6. Domingo, Andrix D. (2018). Obligations and Contracts. Coaching for Results
Publishing
Answer Key to the Assessment Activity
1. Condonation
2. Compensation
3. Novation
4. Payment or Performance
5. Loss of the thing due
6. Confusion or Merger
7. Payment or Performance
8. Condonation
9. Novation
10. Loss of the thing due
