Extinguishment of Obligation

Extinguishment of Obligation 1. Novation 2. Compensation 3. Confusion or Merger 4. Rescission 5. Payment or Performance 6. Loss of the thing due 7. Prescription 8. Remission or Condonation 9. Fulfillment of a resolutory condition 10. Annulment Other Forms of Extinguishment (FC-MAID) 1. Fortuitous Event 2. Compromise 3.Mutual desistance or withdrawal 4.Arrival of resolutory condition 5.Impossibility of condition 6.Death Payment or Performance (1232) Concept – payment is the fulfillment of the prestation due, a fulfillment that extinguishes the obligation by the realization of the purpose for which it was constituted. Not only the delivery of money but also the performance, in any manner, of an obligation. (Civil Code, Art. 1232) Burden of Proving Payment Devolves upon the debtor who pleads payment rather than on the creditor to prove non-payment. Requisites of Payment 1. Payor or the person who pays 2. Payee or the person to whom payment is made 3.Thing to be paid 4.Manner, time, and place of payment Kinds of Payment 1. Normal – when the debtor voluntarily performs the prestation as agreed upon; 2.Abnormal – when the debtor is forced by means of a judicial proceeding either to comply with the prestation or pay indemnity Characteristics of a Valid Payment (1233) 1.Identity- only the prestation agreed upon and no other must be complied with 2.Completeness – the thing or service must be completely delivered or rendered Principle of Integrity (1233) General Rule: A debt shall not be understood to have been paid unless the thing or service in which the obligation consists has been completely delivered or rendered as the case may be. Excpn: 1. When the obligation has been substantially performed in good faith, the obligor may recover as though there had been a strict & complete fulfillment less damage suffered by the obligee. (1234) 2. When the obligee accepts performance knowing its incompleteness or irregularity & without expressing any protest (ESTOPPEL) (1235) Who Must Pay In General 1. Debtor 2. Anyone acting on the debtor's behalf (a) Duly authorized agent or legal representative (b) Successors-in interest and assignees Third Person who is an Interested Party One who has an interest in the extinguishment of the obligation such as: 1. Co-debtors 2. Sureties 3. Guarantors 4. Owners of mortgaged property of pledge Note: The creditor cannot refuse the valid tender of payment from the aforementioned individuals. Effects of Payment 1. The obligation is extinguished 2. The debtor is to fully reimburse the 3rd person who is an interested party 3.The 3rd person is subrogated to the rights of the creditor. Third person who is NOT an interested party but with Debtor's Consent General Rule: The creditor is not bound to accept payment or performance by a 3rd person who has no interest in the fulfillment of the obligation. (1236 (1)) Excpn: Unless there is a stipulation to the contrary. Effects of Payment 1. Third person is entitled to full reimbursement 2. There is legal subrogation Third person who is NOT an interested party & w/out knowledge or Against the Will of the Debtor The 3rd person can only recover insofar as the payment has been beneficial to the debtor. Payment Made by a 3rd Person who Does Not Intend to be Reimbursed Effects of Payment 1. Presumed to be a donation. (1238) 2.Once the consent of the debtor is secured, rules on ordinary donation will apply 3.If the consent is not secured, Art 1236 and 1237 will apply. To Whom Payment Must be Made (1240) 1.The person in whose favor the obligation has been constituted 2. His successors in interest 3. Any person authorized to receive it Effect of payment to unauthorized person It shall not be valid even though made in good faith Excpn: 1. Provided it has redounded to the benefit of the creditor Benefit to the Creditor is presumed in the ff: a) The creditor ratifies the payment (Ratification) b) If by the creditor's conduct, the debtor has been led to believe that the 3rd person had authority to receive the payment (Estoppel) c) If after the payment, the 3rd person acquires the creditor's rights (Subrogation) 2. Payment to the possessor of the credit made in good faith (1242) 3. In obligations to give, payment to an incapacitated person is valid when: a) The incapacitated person has kept the amount or thing delivered or paid b) Payment has been beneficial to the incapacitated person (1241 (1)) Payment made to the creditor by the debtor after the latter has been judicially ordered to retain the debt shall not be valid (1243) unless otherwise stipulated, extrajudicial expenses required by the payment shall be for the account of the debtor. (1247) Thing to be Paid Rule in Monetary Obligations (1249) 1. Must be paid in the currency stipulated, if it is not possible to deliver such currency then in the currency which is legal tender in the Philippines 2.Delivery of PN payable to order or bills of exchange or other mercantile documents shall not produce the effect of payment EXCEPT: a) They have been encashed b) When through the fault of the creditor they have been impaired. Legal Tender: Such currency which may be used for the payment of all debts, whether private or public. The debtor may compel the creditor to accept it in payment of a debt. 1. P1, P5, P10 coins: in amounts not exceeding P1,000.00 2. P0.25 coin or less, in amounts not exceeding P100.00 EXTRAORDINARY INFALTION OR DEFLATION (1250) 1. There must be a decrease or increase in the purchasing power of the currency which is unusual or beyond the common fluctuation in value of the currency; 2.Such decrease or increase could not have been reasonably forseen or which was manifestly beyond the contemplation of the parties at the time the obligation was established. There must be a declaration of such extraordinary inflation or deflation by the BSP. Without such declaration, the creditors cannot demand an increase and the debtors a decrease of what is due to or from them. (Ramos vs CA, G.R. No. 119872, July 7, 1997) Rule when the Obligation Consists in the Delivery of a Determinate Thing Debtor cannot fulfill his obligation by delivering a thing which is a different one, although the latter maybe of the same value as, or more valuable than which is due. (1244 (1)) Rule when the Obligation is to do or not to do & the act is specific Obligor cannot fulfill the obligation by substituting another act or forbearance against the obligee's will. (1244 (2)) Rule when the Obligation Consists in the Delivery of Indeterminate or Generic Things If the contract does not specify the quality & circumstances 1.Creditor cannot demand a thing of superior quality 2. Debtor cannot deliver a thing of inferior quality but if he so desires he may deliver one of superior quality provided it is not of a different kind. (1246) RULE (1248 (1)) The creditor cannot be compelled partially to receive the prestations in which obligation consists. Neither may the debtor be required to make partial payments. EXCPN: (1248 (2)) 1. When the obligation expressly stipulates the contrary; 2. When the different prestations which constitute the objects of the obligation are subject to different terms & conditions; 3. When the debt is in part liquidated and in part unliquidated. Place of Payment (1251) 1. Place agreed upon by the parties 2.If there is no stipulation – delivery of determinate thing – place where the thing might be located at the time the obligation was constituted. 3.In any other case – at the domicile of the debtor. SPECIAL FORMS OF PAYMENT 1. Application of payments 2.Payment by cession 3.Tender of payment and consignation Application of Payment (1252) Designation of the debt to which the payment must be applied when the debtor has several obligations of the same kind in favor of the same creditor. APPLICATION OF PAYMENTS Application of payment is the designation of the debt which is being paid by the debtor who has several obligations of the same kind in favor of the creditor to whom payment is made. General Rule The right to designate the debt to which the payment shall be made belongs to to the debtor. This right is available to the debtor at the time the payment is made. Excpn: If the debtor does not apply, the creditor may designate which debt is paid by specifying it in the receipt. Note: If the debt produces interest, payment of the principal shall not be deemed to have been made until the interest have been paid. Legal Application (1254) The debt more onerous to the debtor, among those due, shall be deemed to have been satisfied. Example 1. Oldest debts vs. recent ones 2. Interest bearing debts 3.Between interest bearing debts, the debt with a higher interest rate 4. A secured debt 5. A debt in which the debtor is a solidary debtor Nature and Burden (1254 (2)) Where the debts are if the same nature and burden, there must always be a pro rata application of the payment, even if the sum paid is exactly the same amount of one of the obligations. Payment by Cession (1255) A special form of payment whereby the debtor assigns or abandons all of his property for the benefit of the creditors in order that from the proceeds thereof, the latter may obtain payment of their credits. 1. Plurality of debts 2. Partial or relative insolvency of the debtor 3. Acceptance of the cession by the creditor Kinds of Payment by Cession 1. Contractual (Art. 1255) 2. Judicial (governed by Insolvency Law) a. Voluntary b. Involuntary TENDER OF PAYMENT and CONSIGNATION Tender of Payment Consists in the manifestation made by the debtor to the creditor of his decision to comply immediately with his obligation with the offer of immediate performance. Tender of payment, even if valid, does not by itself produce legal payment unless it is completed by consignation. CONSIGNATION Is the deposit of the object of the obligation in a competent court in accordance with the rules prescribed by law, after the tender of payment has been refused or because of circumstances which render direct payment to the creditor impossible or inadvisable. Effect on Interest 1. When the tender of payment is made in such a form that the creditor could have immediately realized payment if he had accepted the tender, followed by a prompt attempt of the debtor to deposit the means of payment in court by way of consignation, the accrual of interest on the obligation will be suspended from the date of tender. 2. When the tender of payment is not accompanied by the means of payment, and the debtor did not take any immediate step to make a consignation, then interest is not suspended from the time of tender. Consignation A form of payment, presupposes that there must be a debt that must be paid. Tender of payment alone would not be sufficient. 1. Existence of a valid debt. 2. Consignation was made because of the legal causes provided for under Art.1256. 3. Previous notice of the consignation has been given to the creditor. 4. That the amount was placed at the disposal of the court. 5. After the consignation had been made, the creditor was notified. 1256 1. When the creditor is absent or unknown, or does not appear at the place of payment; 2. When he is incapacitated to receive payment at the time it is due; 3. When, without just cause, he refuses to give a receipt; 4. When two or more persons claim the right to collect; 5. When the title of the obligation has been lost. Effect of Consignation 1.If the creditor accepts the thing or amount consigned without contesting the validity or efficacy of the consignation, the obligation is extinguished. (1261) 2.If the creditor contests the validity of the consignation or if he is absent, the result is litigation. Effects of Withdrawal of the Object/ Amount Deposited 1. Before the creditor has accepted a. Withdrawal by the debtor is a mater of right because he is still the owner of the thing/amount 1. With consent of the creditor a. Creditor losses every preference which he may have over the thing; b. Solidary co-debtor, guarantors and sureties are released c. Solidary debtors are released only from their solidary liability but not from their shares in the obligation d. the obligation is revived. LOSS OF THE THING DUE To give determinate thing (1262) Obligation is extinguished 1. Thing lost is determinate 2. There was no fault on the part of the debtor 3. The thing is lost before the debtor incurred in delay. Generic Things (1263) Does not extinguish the obligation Genus never persihes Effect of Partial loss (1264) General Rule: Does not extinguish the obligation EXCPN: when the partial loss or destruction of the thing is of such importance that would be tantamount to a complete loss. If the thing is in the debtor's possession (1265) It shall be presumed that the loss was due to his fault unless there is proof to the contrary. EXCPN: No such presumption in case of earthquake, flood,storm, or other natural calamity. Effect of Impossibility of Performance of Obligation to Do Obligor is released from the performance of the obligation. (1266) Doctrine of Unforseen Events – When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the court should authorize to release the obligor in whole or in part. Rule if Obligation Arises from a Criminal Offense (1268) General Rule: Debtor shall not be exempted from the payment of the price whatever may be the cause for the loss. EXPN: When the thing having been offered by the debtor to the person who should receive it, the latter refused without justification. CONDONATION OR REMISSION OF DEBT Condonation or Remission An act of liberality by virtue of which the obligee, 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 remission refers. 1. It must be gratuitous 2. It must be accepted by the obligor 3.The obligation must be demandable 4. Parties have the capacity 5.Not inofficious 6.Must comply with the forms of donation should it be express. Kinds of Remission 1. As to Form a. Express – made in accordance with the formalities prescribed by law for donations b. Implied – can be deduced from the acts of the obligee. 1.As to Extent a. Total – entire obligation is extinguished b. Partial – only an aspect of the obligation is extinguished. 3. As to Constitution a. Inter Vivos – by agreement of the obligee and obligor b. Mortis Causa – when it is constituted by last will and testament IMPLIED REMISSION- If the creditor voluntarily delivers the private document evidencing the credit to the debtor. (1271) PRESUMPTION OF REUNUNCIATION -When such private document is found in the possession of the debtor, it is presumed that the creditor voluntarily delivered the same. (1272) If the obligation is joint, the presumption of remission pertains only to the share of the debtor who is in possession of the document. If solidary – total obligation Confusion or Merger of Rights Confusion – it is the merger of the characters of the creditor and the debtor in one and the same person with respect to the same obligation, by virtue of which the obligation is extinguished. (1275) Requisites 1. It must take place between the creditor and the debtor. 2. The very same obligation must be involved. 3.The confusion must be total. Effects of Confusion/Merger (1276-1277) 1. If confusion takes place in the person of either the principal creditor or principal debtor – entire obligation is extinguished. 2. If confusion takes place in the person of either the subsidiary creditor or subsidiary debtor – no extinguishment of principal obligation, only substitution. (1276) 3. If confusion takes place in 1 of the joint debtors – principal obligation extinguished up to the share w/c corresponds to him. (1277) 4. If confusion takes place in 1 of the solidary debtors – entire obligation is extinguished. Compensation Mode of extinguishing in the concurrent amount of the obligation of those persons who are reciprocally debtors and creditors of each other. It extinguishes both debts to the extent of the amount covered by the amount of the other. Kinds of Compensation 1. As to cause a. Legal – takes effect by operation of law b. Voluntary c. Judicial d. Facultative 1. As to Effect a. Total b. Partial Requisites 1. The parties are principal creditors and debtors of each other 2.Both debts consist in a sum of money or of consumable of the same kind & quality 3.The 2 debts are due or demandable 4.The 2 debts are liquidated 5.No retention or controversy commenced by a third person Effects of Assignment of Rights 1. With the consent of the debtor- debtor cannot set compensation unless he reserved his right to compensation 2.With knowledge but w/out consent of debtor – debtor may set-up compensation prior to the assignment but not to subsequent ones 3.If w/out knowledge of the debtor – may set up compensation of all credits which he may have against the assignor and which may have become demandable before he was informed of the assignment. Debts w/c cannot be Compromised 1. Arising from depositum 2.Arising from commodatum 3.Claims for support 4.Obligations arising from criminal offenses 5.Certain obligations in favor of the government Facultative Compensation Compensation which can be set up only at the option of the creditor when legal compensation cannot take place because of want of some legal requisites. Novation It is the substitution or change of an obligation by another, resulting in its extinguishment or modification, either by changing its object or principal conditions, or by substituting another in place of the debtor, or by subrogating a third person in the rights of the creditor. (1291) Old obligation is extinguished New one is created Requisites 1. Previous valid & existing obligation 2. Capacity of the contracting parties 3. Animus novandi 4.Substantial difference between the old and the new obligation 5.Validity of the new obligation Kinds of Novation 1.As to its Essence 3. Extent/Effect a.Objective/Real a. Total b. Subjective/Personal b. partial c.Mixed 1.Form a. Express b. Implied Test of Incompatibility Whether or not the old and new obligation can stand together, each having its own independent existence. If they can stand together, there is no incompatibility hence, no novation. If they cannot stand together, there is incompatibility, consequently, there is novation. Novation is never presumed. Objective Novation 1.Changing the cause of the obligation 2.Changing the object of the obligation 3.Changing the principal pr essential conditions of the obligation REQUISITES: 1. New obligation expressly declares that the old is extinguished or 2. New obligation is on every point incompatible with the old one (Ajax Marketing vs. CA 118585, September 14, 1995) Novation by Substitution of Debtors: A subjective/personal novation consists in the substitution of a new debtor in place of the original debtor. 1. EXPROMISION – effected with the consent of the creditor at the instance of the new debtor even without the consent of the old debtor. REQUISITES  Initiative for substitution must come from the new debtor  Consent of the creditor to the substitution  Old debtor must be released from the obligation Kinds of Substitution by Expromision 1.Substitution with the knowledge and consent of the old debtor 2.Substitution without the knowledge or against the will of the old debtor DELAGACION – effected with the consent of the creditor at the instance of the old debtor (delegante) with the concurrence of the new debtor (delegado) 1. Initiative must come from the old debtor 2. consent of the new debtor 3. Acceptance by the creditor (delegatorio) 4. Old debtor must be released from his obligation TAKE NOTE! In either of the two modes of substitution, the consent of the creditor is an indispensable requirement. Rights of the New Debtor 1.EXPROMISION a) With knowledge of the original debtor – reimbursement & subrogation b) Without knowledge of the original debtor – reimbursement only 2.DELAGACION  Reimbursement and subrogation Effect of Insolvency or Non-Fulfillment by New Debtor 1.EXPROMISION a)With knowledge & consent of the original debtor- it shall revive the original debtor's liability to the creditor. b) Without the knowledge & against the will of the original debtor- the new debtor's insolvency or nonfullfillment shall not revive the original debtor's liability to the creditor. 2.DELEGACION – the right of the creditor can no longer be revived except in the ff cases: a)Insolvency already existing & of public knowledge at the time when the original debtor delegated his debt b)Insolvency was already existing and known to the original debtor when he delegated his debt. Effects of Novation upon Accessory Obligations GENERAL RULE: when the principal obligation is extinguished in consequence of a novation, accessory obligation may subsist only insofar as they may benefit third persons who did not give their consent. Effects of Condition in Novation If the original obligation was subject to suspensive condition, the new obligation shall be under the same condition, unless otherwise stipulated (1299) Novation by Subrogation A personal novation effected by subrogating a third person in the rights of the creditor. 1. Legal 2. Conventional Conventional subrogation – the consent of all the parties is essential. Legal subrogation General Rule : not presumed EXCPN: 1. when a creditor pays another creditor who is not preferred without debtor's knowledge; 2. when a 3rd 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. Effects of Subrogation 1. Total – transfers to the person subrogated the credit with all the rights the original creditor has against the debtor or third persons. 2. Partial – a creditor to whom partial payment has been made may exercise his right for the remainder and he shall be preferred to the person who has been subrogated in his place. COMPROMISE A contract whereby the parties, by making reciprocal concessions, avoid litigation or put an end to one already commenced. Cannot be compromised: 1. Civil status of persons 2. Validity of marriage 3. Legal separation 4. Future support