ARTICLE 1231

OBLIGATIONS ARE EXTINGUISHED:

(1) BY PAYMENT OR PERFORMANCE;

(2) BY 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
OTHER CAUSES OF EXTINGUISHMENT OF OBLIGATIONS, SUCH AS ANNULMENT, RESCISSION, FULFILLMENT OF A RESOLUTORY
CONDITION, AND PRESCRIPTION, ARE GOVERNED ELSEWHERE IN THIS CODE. (1156A)

CAUSES OF EXTINGUISHMENT OF OBLIGATIONS

1. Death of the party if obligation is personal

2. Mutual withdrawal where after the borrower’s loan is approved instead of insisting for the release, he asked that the
mortgage given by him as security be cancelled by the debtor (DBP). Mutual disagreement (which is the case above)
can extinguish a contract. (Mutual agreement - opposite)
3. Arrival of resolutory period
4. Compromise
5. Impossibility of fulfillment
6. Happening of a fortuitous event

ARTICLE 1232
PAYMENT MEANS NOT ONLY THE DELIVERY OF MONEY BUT ALSO THE PERFORMANCE, IN ANY OTHER MANNER, OF AN OBLIGATION. (N)

MEANING OF PAYMENT

1. Ordinary parlance – only to delivery of money

2. Payment – not only consists of money but also giving of a thing or doing/not doing of an act.
If debtor pays damages/penalty to fulfill an obligation, there is also payment
PAYMENT = PERFORMANCE

ARTICLE 1233
A DEBT SHALL NOT HAVE BEEN 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. (1157)

WHEN DEBT IS CONSIDERED PAID

Debt – an obligation to deliver money/a thing/to do or not to do an act

1. Integrity of prestation – a debt to deliver a thing (including money) or to do service. It has to be delivered or
rendered completely for the debt to be paid. Partial/Irregular performance will not extinguish obligation
2. Identitiy of the prestation – the very prestation due must be delivered/performed

ARTICLE 1234
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. (N)

NOTE TO SELF Remember to reread examples in book

 RECOVERY ALLOWED IN CASE OF SUBSTANTIAL PERFORMANCE IN GOOD FAITH

This article if the first exception to Article 1233 because:

 Adopted from American Law

 In case of substantial performance, obligee is benefited
 Obligor should be allowed to recover (as if there have been a complete fulfillment less damages suffered by obligee)
 Compensation for breach committed by obligor

REQUISITES FOR THE APPLICATION OF ARTICLE 1234

1. There must be substantial performance
2. The obligor must be in good faith

ARTICLE 1235
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. (N)

RECOVERY ALLOWED WHEN INCOMPLETE OR IRREGULAR PERFORMANCE IS WAIVED

This is another exception to article 1233, and founded on the principle of estroppel.

 If payment irregular/complete, creditor may reject

 If creditor accepts, the right must be waived, then the obligation is estinguished

REQUISITES FOR THE APPLICATION OF ARTICLE 1235

1. The obligee knows that the performance is incomplete/irregular
2. He accepts performance without expressing protest/objection

ARTICLE 1236
THE CREDITOR IS NOT TO 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 AS THE PAYMENT HAS BEEN BENEFICIAL TO THE
DEBTOR. (1158A)

PERSONS FROM WHOM THE CREDITOR MUST ACCEPT PAYMENT

1. Debtor
2. Any person who has an interest in the obligation (e.g. guarantor)
3. Third person who has no interest in obligation when there is stipulation he can make payment

CREDITOR MAY REFUSE PAYMENT BY A THIRD PERSON

 Creditor should have a right to insist on the liability on the debtor unlike before; the creditor cannot refuse payment
made by the third person.
 Creditor is also not compelled to accept payment by a third person whom he dislikes. The creditor may not desire to
have any dealings with the third person (May it be for personal reasons).

The creditor is only making sure, that’s why he may not accept payment from a third person.

NOTE TO SELF Remember to reread examples in book

 EFFECT OF PAYMENT BY THIRD PERSON

*Payment/performance may be made by any person not incapacitated, even without the knowledge or against will of debtor,
and although he has absolutely no interest in obligation.

1. If made without the knowledge or against the will of the debtor – payer can recover from the debtor only insofar
the payment has been beneficial to the latter
2. If made with the knowledge of the debtor – the payer has rights of reimbursement and subrogation (to recover
what he has paid – not necessarily the amount of the debt), and to acquire all rights of debtor.

ARTICLE 1237
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. (1159A)

RIGHT OF THIRD PERSON TO SUBROGATION

 Whoever pays in behalf of debtor is entitles to subrogation, if payment is with consent of latter.
 If payment is without knowledge or against will of debtor then third person cannot compel creditor to subrogate him in
the latter’s accessory rights of mortgage, guaranty, or penalty.
 Subrogation can only take place with debtor’s consent.
 Third person who w/o necessity paid under such condition is protected by his right to reimbursement

SUBROGATION AND REIMBURSEMENT DISTINGUISHED

Subrogation Reimbursement
 Person who pays for debtor is put into shoes of  Third person entitled by reason of payment has
creditor merely the bare right to be refunded (only to extent of
 Payor acquires not only right to reimburse what he article 1236), this is without right to the guarantees
has paid but also all other rights creditor could have and securities of original obligation
exercised (credit against debtor or against third
persons – guarantors or possesors of mortgages)
 There is no real extinction of obligation, only change
of creditor

ARTICLE 1238
PAYMENT MADE BY A THIRD PERSON WHO DOES NOT INTEND TO BE REIMBURSED BY THE DEBTOR IS DEEMED TO BE A DONATION, WHICH
REQUIRES THE DEBTOR’S CONSENT. BUT THE PAYMENT IS IN ANY CASE VALID AS TO THE CREDITOR WHO HAS ACCEPTED IT. (N)

PAYMENT BY A THIRD PERSON WHO DOESN’T INTEND TO BE REIMBURSED

This article embodies the idea that no one should be compelled to accept the generosity of another. If paying the third person
does not intend to reimburse then the payment is made into a donation which requires the debtor’s consent to be valid.

However if creditor accepts payment, it will be also considered as a donation even without consent of the debtor.

*Example: D owes C 1php, S paid D’s obligation without intention of being reimbursed. D had previously accepted S’s
generosity. D is not liable to S and D’s obligation is extinguished. If D did not give consent to the donation, S may reimburse,
even id S didn’t intend to be reimbursed. The obligation of D to C is extinguished because the payment is valid to C who has
accepted it. D cannot legally refuse to pay S and insist to pay C.

NOTE TO SELF Remember to reread examples in book

 ARTICLE 1239
IN OBLIGATIONS TO GIVE, PAYMENT MADE BY ONE WHO DOES NOT HAVE FREE DISPOSAL OF THE THING DUE AND CAPACITY TO ALIENATE
IT SHALL NOT BE VALID, WITHOUT PREJUDICE TO THE PROVISIONS OF THE ARTICLE 1247 UNDER THE TITLE ON “NATURAL OBLIGATIONS.”
(1160A)

MEANING OF “FREE DISPOSAL OF THING DUE” AND “CAPACITY TO ALIENATE”

1. Free disposal of thing due – thing to be delivered must not be subject to any claim, lien or encumbrance (mortgage,
pledge) of a third person
2. Capacity to alienate – person is not incapacitated to enter into contracts and to make the disposal of a thing due

“FREE DISPOSAL OF THING DUE” AND “CAPACITY TO ALIENATE” REQUIRED

 In obligations to give, payment by one who doesn’t have the free disposition of a free thing due and capacity to alienate
is not valid (paid thing can be recovered)
Exception: creditor cannot be compelled to accept payment where the person has no capacity to make it

ARTICLE 1240
PAYMENT SHALL BE MADE TO THE PERSON IN WHOSE FAVOR THE OBLIGATION HAS BEEN CONSTITUTED, OR HIS SUCCESSOR IN INTEREST,
OR ANY PERSON AUTHORIZED TO RECEIVE IT. (1162A)

PERSON TO WHOM PAYMENT SHALL BE MADE

1. Creditor or oblige
2. His successor in interest
3. Any person authorized to receive it

Creditor referred to must be the creditor at time of payment not at time of c0nstitution of obligation

ARTICLE 1241
PAYMENT TO A PERSON WHO IS INCAPACITATED TO ADMINISTER HIS PROPERTY SHALL BE VALID AS IF HE HAS KEPT THE THING
DELIVERED, OR INSOFAR AS THE PAYMENT HAS BEEN BENEFICIAL TO HIM.

PAYMENT MADE TO A THIRD PERSON SHALL ALSO BE VALID INSOFAR AS IT HAS REDOUNDED TO THE BENEFIT OF THE CREDITOR. SUCH
BENEFIT TO THE CREDITOR NEED NOT TO BE PROVED IN THE FOLLOWING CASES:

1. IF AFTER THE PAYMENT, THE THIRD PERSON ACQUIRES THE CREDITOR’S RIGHTS;
2. IF THE CREDITORS RATIFIES THE PAYMENT TO THE THIRD PERSON;
3. IF BY THE CREDITORS CONDUCT, THE DEBTOR HAS BEEN LED TO BELIEVE THAT THE THIRD PERSON HAD AUTHORITY TO RECEIVE
THE PAYMENT. (1163A)

EFFECT OF PAYMENT TO AN INCAPACITATED PERSON

 Payment to a person unable to manage his property is not valid unless such incapacitated person kept the thing paid
or delivered, or it was benefited by payment.
 In absence of benefit, debtor may be made to pay again by the creditor’s guardian/incapacitated person himself (when
capacity is recovered)
 Proof of benefit is obligatory upon debtor who paid

EFFECT OF PAYMENT TO THIRD PERSON

 Payment to third person or wrong party is not valid unless it was redounded to benefit of creditor

NOTE TO SELF Remember to reread examples in book

  The payment made by debtor to third person benefited by creditor is no presumed and must be established by person in
proving this fact
 In absence of proof, payment thereof in error and in good faith will not deprive creditor to demand payment

WHEN BENEFIT TO CREDITOR MAY NOT BE PROVED BY DEBTOR

1. Subrogation of payer in creditor’s rights

2. Ratification by creditor
3. Estroppel on part of creditor – admission or representation is rendered conclusive upon person making it and cannot
be denied as against person relying thereon.

ARTICLE 1242
PAYMENT MADE IN GOOD FAITH TO ANY PERSON IN POSSESSION OF THE CREDIT SHALL RELEASE THE DEBTOR. (1164)

PAYMENT TO THIRD PERSON IN POSSESSION OF CREDIT

 This refers to the possession of credit itself

 Mere possession of instrument(unless transferable by delivery) does not entitle holder to payment
 Payment does not release the debtor
 Payor must act in good faith

ARTICLE 1243
PAYMENT MADE TO THE CREDITOR BY THE DEBTOR AFTER THE LATTER HAS BEEN JUDICIALLY ORDERED TO RETAIN THE DEBT SHALL NOT
BE VALID (1165)

PAYMENT TO THE CREDITOR NOT VALID

 In action against debtor that is the creditor of another(during pendency of case), the debtor-stranger may be ordered
by court to retain the debt until right of plaintiff, the creditor in main litigation is resolved
 Payment made by debtor-stranger shall be invalid id plaintiff wins case and cannot collect from debtor to whom
payment is made (considered to have made in bad faith).

ARTICLE 1244
THE DEBTOR OF A THING CANNOT COMPEL THE CREDITOR TO RECEIVE A DIFFERENT ONE ALTHOUGH THE LATTER MAY BE OF THE SAME
VALUE AS, OR MORE VALUABLE THAN THAT WHICH IS DUE.

IN OBLIGATIONS TO DO OR NOT TO DO, AN ACT OR FORBEARANCE CANNOT BE SUBSTITUTED BY ANOTHER ACT OR FORBEARANCE AGAINST
OBLIGEE’S WILL. (1166A)

VERY PRESTATION DUE MUST BE COMPLIED WITH

 First paragraph refers to a real obligation to deliver specific thing. A thing different from what is due cannot be
demanded against will of debtor or creditor.
 Second refers to personal (negative and positive) obligations. Act to be performed or prohibited can’t substituted
against obligee’s will

WHEN PRESTATION CAN BE SUBSTITUTED

 Substitution can happen if oblige consents

 Facultative obligations – debtor is given right to render another prestation in substitution
 This article will not apply in case of waiver by creditor or substitution is allowed with consent of creditor

ARTICLE 1245

NOTE TO SELF Remember to reread examples in book

DATION IN PAYMENT WHEREBY PROPERTY IS ALIENATED TO THE CREDITOR IN SATISFACTION OF A DEBT IN MONEY, SHALL BE GOVERNED
BY THE LAW OF SALES. (N)

SPECIAL FORMS OF PAYMENT

1. Dation in payment – (adjudication, dacion en pago) is conveyance of ownership of a thing as an accepted equivalent of
performance. It is not an ordinary way of extinguishing obligation. An existing debt in money is satisfied not by
payment of money but alienation of property.
2. Application of payments (Article 1253) – strictly speaking, this is not a special form of payment
3. Payment by cession (Article 1255)
4. Tender of payment and consignation (Articles 1256 to 1261)

*conveyance – in effect, a novation of the contract

GOVERNING LAW

Law of sales governs because dation in payment may be considered specie of sale: amount of the money due becomes price of
thing alienated

ARTICLE 1246
WHEN THE OBLIGATION CONSISTS IN THE DELIVERY OF AN INDETERMINATE OR GENERIC THING, WHOSE QUALITY AND CIRCUMSTANCES
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 AND OTHER CIRCUMSTANCES SHALL BE TAKEN INTO CONSIDERATION. (1167A)

RULE OF MEDIUM QUALITY

 If to deliver a specific thing, thing itself should be delivered.

 If it’s to deliver a generic thing, purpose of obligation and other circumstances will be taken into consideration to
determine quality of thing to be delivered.
 If there has been disagreement by the parties regarding precise declaration in obligation or finding one thing exactly
like the other, law steps in.
 Benefit of article may be waived by creditor if he accepted thing of inferior quality
 Benefit of article may be waived by debtor if he delivered thing of superior quality

ARTICLE 1247
UNLESS IT IS OTHERWISE STIPULATED, THE EXTRAJUDICIAL EXPENSES REQUIRED BY THE PAYMENT SHALL BE FOR THE ACCOUNT OF THE
DEBTOR. WITH REGARD TO JUDICIAL COSTS, THE RULES OF COURT SHALL GOVERN. (1168A)

DEBTOR PAYS FOR EXTRAJUDICIAL EXPENSES

 Extrajudicial expenses are for account of debtor because obligation is extinguished when payment is made unless
otherwise stipulated

LOSING PARTY GENERALLY PAYS JUDICIAL COSTS

 Judicial costs – statutory amounts allowed to a party to an action for his expenses incurred in the action
 Costs will be paid by the losing party however the court may (for special reasons) adjudge that the cost may be paid by
either party or the payment be equally divided amongst the parties.
 No costs against government, unless provided by law

ARTICLE 1248

NOTE TO SELF Remember to reread examples in book

UNLESS THERE IS AN EXPRESS STIPULATION TO THAT EFFECT, THE CREDITOR CANNOT BE COMPELLED PARTIALLY TO RECEIVE THE
PRESTATIONS WHICH THE OBLIGATION CONSISTS. NEITHER MAY THE DEBTOR BE REQUIRED TO MAKE PARTIAL PAYMENTS.

HOWEVER, WHEN THE DEBT IS IN PART LIQUIDATED AND IN PART UNLIQUIDATED, THE CREDITOR MAY DEMAND AND THE DEBTOR MAY
EFFECT THE PAYMENT OF THE FORMER WITHOUT WAITING FOR LIQUIDATION OF THE LATTER. (1169A)

PERFORMANCE OF OBLIGATION SHOULD BE COMPLETE

 This article only covers once creditor – one debtor basis

 Obligation will be extinguished if there is complete performance of prestation
 The creditor may accept but cannot be compelled to receive partial performance
 Debtor is required to comply with whole obligation but cannot be required to make partial payments if he doesn’t want
to

WHEN PARTIAL PERFORMANCE IS ALLOWED

1. When there is an express stipulation to that effect

2. When debt is part liquidated and unliquidated
3. When prestations in which the obligation consists are subject to different terms which affect some of them
If obligation has several distinct prestation, prestations need not to be done simultaneously but successive execution of
the prestations must be complete.

ARTICLE 1249
THE PAYMENT OF DEBTS IN MONEY SHALL BE MADE IN THE CURRENCY STIPULATED, AND IF IT IS NOT POSSIBLE TO DELIVER SUCH
CURRENCY, THEN THE CURRENCY WHICH IS THE LEGAL TENDER IN THE PHILIPPINES.

THE DELIVERY OF PROMISSORY NOTES PAYABLE TO ORDER, OR BILLS OF EXCHANGE OR OTHER MERCANTILE DOCUMENTS SHALL PRODUCE
THE EFFECT OF PAYMENT ONLY WHEN THEY HAVE BEEN CASHED, OR WHEN THROUGH THE FAULT OF THE CREDITOR THEY HAVE BEEN
IMPAIRED,

IN THE MEANTIME, THE ACTION DERIVED FROM THE ORIGINAL OBLIGATION SHALL BE HELD IN ABEYANCE. (1170)

MEANING OF LEGAL TENDER

Legal tender is 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

 Debts in money shall be paid in the currency stipulated, if currency not available then pay in the currency which is the
legal tender in the Philippines.
 All coins and notes issued by Bangko Sentral ng Pilipinas is legal tender for all debts public or private
 Coins are legal tender amounts not exceeding 50php for denominations 0.25php and above, and in those amounts not
exceeding 20php for denominations 0.10php or less.
 All coins and bills above 1php are valid for tenders of any amount

PAYMENT BY MEANS OF INSTRUMENTS OF CREDITS

1. Right of creditor to refuse or accept – if the payment is not a form of legal tender (checks, bills of exchange, etc.),
the creditor cannot be compelled to accept them, but he may accept without acceptance producing the effect of
payment.
2. Effect on obligation – payment by mercantile documents cannot extinguish obligation
a. Until they have been cashed
b. Unless they have been impaired through fault of creditor

NOTE TO SELF Remember to reread examples in book

 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. (N)

MEANING OF INFLATION AND DEFLATION

1. Inflation – sharp sudden increase of money and/or credit without increase in business transactions. Inflation causes
drop of money, rise of general price level.
2. Deflation – reduction in volume and circulation of money or credit resulting in decline of general price level

BASIS OF PAYMENT IN CASE OF EXTRAORDINARY INFLATION OR DEFLATION

 Purchasing value at time of establishment of obligation shall be the basis of payment

 If there has been an extraordinary increase/decrease in price that wasn’t foreseen, this is subject to agreement of the
parties to the contrary
 “extraordinary inflation or deflation of the currency stipulated”
 This article envisages contractual obligations where a currency selected by the parties is the medium of payment

ARTICLE 1251
PAYMENT SHALL BE MADE IN THE PLACE DESIGNATED IN THE OBLIGATION.

THERE BEING NO EXPRESS STIPULATION AND IF THE UNDERTAKING IS TO DELIVER A DETERMINATE THING, THE PAYMENT SHALL BE MADE
WHEREVER THE THING MIGHT BE AT THE MOMENT THE OBLIGATION WAS CONSTITUTED.

IN ANY OTHER CASE THE PLACE OF PAYMENT SHALL BE THE DOMICILE OF THE DEBTOR.

IF THE DEBTOR CHANGES HIS DOMICILE IN BAD FAITH OR AFTER HE HAS INCURRED IN DELAY, THE ADDITIONAL EXPENSES SHALL BE
BORNE BY HIM.

THERE PROVISIONS ARE WITHOUT PREJUDICE TO VENUE UNDER THE RULES OF COURT. (1171A)

PLACE WHERE OBLIGATION SHALL BE PAID

1. If there is stipulation, the payment will be made in the place designated

2. If the thing to be delivered is specific, payment shall be made at the place where the thing was upon completion of
contract
3. If no stipulation and thing is generic, place of payment shall be domicile to the debtor, creditor bears expenses to going
to creditor’s place to accept payment

Venue – place where a court suit or action must be filed or instituted

Domicile/Legal Residence – is a place of a person’s habitual residence, place where he has intention of returning in case
of absence (e.g. home). Requires bodily presence in that place and intention to make it one’s domicile
Residence – is an element of domicile. Requires bodily presence as an inhabitant in a given place

ARTICLE 1252

NOTE TO SELF Remember to reread examples in book

HE WHO HAS VARIOUS DEBTS OF THE SAME KIND IN FAVOR OF ONE AND THE SAME CREDITOR, MAY DECLARE AT THE TIME OF MAKING
THE PAYMENT, TO WHICH OF THEM THE TIME MUST BE APPLIED. UNLESS THE PARTIES SO STIPULATE, OR WHEN THE APPLICATION OF
PAYMENT IS MADE BY THE PARTY FOR WHOSE BENEFIT THE TERM HAS BEEN CONSTITUTED, APPLICATION SHALL NOT BE MADE AS TO
DEBTS WHICH ARE NOT DUE.

IF THE DEBTOR ACCEPTS FROM THE CREDITOR A RECEIPT IN WHICH AN APPLICATION OF THE PAYMENT IS MADE, THE FORMER CANNOT
COMPLAIN OF THE SAME, UNLESS THERE IS A CAUSE FOR INVADING THE CONTRACT. (1172A)

MEANING OF APPLICATION OF PAYMENTS

Application of payments – designation of debt to which should be applied the payment made by a debtor who has various
debts of the same kind in favor of the one and the same creditor

REQUISITES OF APPLICATION OF PAYMENTS

1. There must be one debtor and one creditor

2. There must be two or more debts
3. Debts must be of the same kind
4. Debts to which payment made but the debtor has been applied and must be due
5. Payment must not be enough to cover all debts

APPLICATIONS AS TO DEBTS NOT YET DUE

Cannot be made unless:

1. There is stipulation that the debtor may so apply

2. It’s made by debtor or creditor for whose benefit the period has been constituted

RULES ON APPLICATION OF PAYMENTS

1. Debtor has made first choice; he must indicate at time of making payment which debt he is paying. He cannot reapply
that particular payment to another debt. The initial decision of the debtor is irrevocable unless creditor consents to the
change.
2. If debtor does not apply payment, creditor may decide receipt which debt is being paid
3. If creditor did not make application/application not valid, debt which is most onerous to the debtor shall be satisfied
4. If debts are due of the same nature and burden, payment shall be applied to all of them proportionately

ARTICLE 1253
IF THE DEBT PRODUCES INTEREST, PAYMENT OF THE PRINCIPAL SHALL NOT BE DEEMED TO HAVE BEEN COVERED. (1173)

INTEREST EARNED PAID AHEAD OF PRINCIPAL

 Debtor can’t choose to credit payment to principal before interest is paid

 Whatever balance is left paid to the interest goes to the principal
 Creditor can refuse application of debtor contrary to provisions of this article
 Rule is subject to any agreement between the parties/waiver from creditor

ARTICLE 1254
WHEN THE PAYMENT CANNOT BE APPLIED IN ACCORDANCE WITH THE PRECEDING RULES, OR IF APPLICATION CANNOT BE INFERRED FROM
OTHER CIRCUMSTANCES, THE DEBT WHICH IS 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. (1174A)

NOTE TO SELF Remember to reread examples in book

 LEGAL APPLICATION OF PAYMENTS

If case no application of payment has been made to debtor/creditor, payment shall be applied to most onerous debt, if all of the
same nature and burden, to all of them proportionately

WHEN A DEBT MORE ONEROUS THAN ANOTHER

Debt more onerous if more burden to debtor. Onerous-ment is depended on circumstances, but there are some rules by the
Supreme Court:

1. Interest-bearing debt in more onerous than a non-interest-bearing (even if this may be an older debt); if two interest-
bearing debts, one with a higher rate is more onerous
2. Debt as a sole debtor is more onerous than as a solidary debtor
3. Debts secured by mortgage are more onerous than unsecured ones
4. Obligation with penalty clause is more onerous than one without

WHERE DEBTS SUBJECT TO DIFFERENT BURDENS

If debts are subject to different burdens (e.g. one with penalty, one with mortgage), payment will be applied to all of them,
proportionately

ARTICLE 1255
THE DEBTOR MAY CEDE OR ASSIGN HIS PROPERTY TO HIS CREDITORS IN PAYMENT OF HIS DEBTS. THIS CESSION, UNLESS THERE IS
STIPULATION TO THE CONTRARY, SHALL ONLY RELEASE THE DEBTOR FROM RESPONSIBILITY FOR THE NET PROCEEDS OF THE THING
ASSIGNED. THE AGREEMENTS WHICH ON THE EFFECT OF THE CESSION, ARE MADE BETWEEN THE DEBTOR AND HIS CREDITORS SHALL BE
GOVERNED BY SPECIAL LAWS (1175A)

REQUISITES OF PAYMENT BY CESSION

Payment by cession – a special form of payment. An assignment/abandonment of all the properties of the debtor for the
benefit of his creditors so that the latter may sell and apply the proceeds thereof to the satisfaction of their credits.

1. There must be two or more creditors

2. Debtor must be (partially) insolvent
3. Cession must be accepted by creditors

EFFECT OF PAYMENT BY CESSION

 Unless there is stipulation to the contrary, assignment does not make the creditors owner of the property of the debtor
 Debtor is then released from his obligation only up to the net proceeds of the sale of the property assigned; debtor still
liable if there is remaining balance

DATION IN PAYMENT AND CESSION DISTINGUISHED

Dation
 There is usually only one creditor
 Does not presuppose insolvency of debtor
 Does not involve all properties of debtor
 Creditor becomes owner of the thing given by debtor
 Act of novation
Cession
 Several creditors
 Debtor is insolvent a time of assignment
 Extends to all property of debtor subject to execution
 Creditor only acquire the right to sell the thing and
apply proceeds to their credits proportionately
 Not an act of novation

BOTH ARE SUBSTITUTE FORMS OF PAYMENT/PERFORMANCE

ARTICLE 1256

NOTE TO SELF Remember to reread examples in book

IF THE CREDITOR TO WHOM TENDER OF PAYMENT HAS BEEN REFUSED WITHOUT THE CAUSE TO ACCEPT IT, THE DEBTOR SHALL BE
RELEASED FROM RESPONSIBILITY BY CONSIGNATION OF THE THING OR SUM DUE

CONSIGNATION ALONE SHALL PRODUCE THE SAME EFFECT IN THE FOLLOWING CASES:

1. WHEN THE CREDITOR IS ABSENT OR UNKNOWN, OR DOES NOT APPEAR AT THE PLACE OF PAYMENT
2. WHEN HE IS INCAPACITATED TO RECEIVE THE PAYMENT AT THE TIME IT IS DUE;
3. WHEN, WITHOUT JUST CAUSE, REFUSES TO GIVE A RECEIPT
4. WHEN TWO OR MORE PERSONS CLAIM THE SAME RIGHT TO COLLECT
5. WHEN TITLE OF OBLIGATION HAS BEEN LOST. (1176A)

MEANING OF “TENDER OF PAYMENT AND CONSIGNATION”

1. Tender of payment – act (on part of debtor) of offering the credit or amount due to the creditor. Debtor must show
that he has (possession) the thing/money to be delivered at the time of offer.
2. Consignation – act of depositing thing/amount due with the proper court when the creditor does not want or cannot
receive it after complying with the formalities provided in the law. Consignation is always judicial and requires tender
of payment.

REQUISITES OF A VALID CONSIGNATION

1. Existence of valid debt which is due

2. Tender of payment by debtor and refusal (w/o valid reason) by the creditor to accept it
3. Previous notice of consignation to people interested in fulfillment of obligation
4. Consignation of thing/sum due
5. Subsequent notice of consignation made to the interested parties

WHEN TENDER OF PAYMENT NOT REQUIRED

 Tender of payment not necessary before debtor can consign thing due with the court
 A creditor without legal justification must inform debtor that payment will not be accepted thereby waives a payment
when payment is due
 Debtor is then excused from making a formal tender of the money on that date
 Debtor does not incur default by failing to make a fruitless tender after notification from the creditor that money will
not be received

REQUIREMENTS OF VALID TENDER OF PAYMENT

1. Tender of payment must comply with rules of payment, the tender, even if valid, does not itself produce legal payment,
unless it is completed by consignation
2. Must be unconditional and for the whole amount
3. It must be actually made. Manifestation of a desire or intention to pay is enough

ARTICLE 1257
IN ORDER THAT CONSIGNATION OF THE THING DUE MAY RELEASE THE OBLIGOR, IT MUST BE FIRST ANNOUNCED TO THE PERSONS
INTERESTED IN THE FULFILLMENT OF THE OBLIGATION.

THE CONSIGNATION SHALL BE INEFFECTUAL IF IT IS NOT MADE STRICTLY IN CONSONANCE WITH THE PROVISIONS WHICH REGULATE
PAYMENT. (1177)

PRIOR NOTICE TO PERSONS INTERESTED REQUIRED

NOTE TO SELF Remember to reread examples in book

  Absence of prior notice to the persons interested (guarantors, mortgagees, solidary debtors/creditors) to fulfill
obligation. Consignation as payment shall be void.
 Purpose of notice is for creditor to reflect on previous refusal to accept payment because expenses of consignation
shall be charged against him
 If the thing consigned is lost, creditor shall bear risk

CONSIGNATION MUST COMPLY WITH PROVISIONS ON PAYMENT

 Consignation to amount to a valid payment, must also comply with the provisions which regulate payment
 Payment should be made in legal tender (no bank checks, commercial documents, etc.)

ARTICLE 1258
CONSIGNATION SHALL BE MADE BY DEPOSITING THE THINGS DUE AT THE DISPOSAL OF JUDICIAL AUTHORITY, BEFORE WHOM THE
TENDER OF PAYMENT SHALL BE PROVED, IN A PROPER CASE, AND THE ANNOUNCEMENT OF THE CONSIGNATION IN OTHER CASES.

THE CONSIGNATION HAVING BEEN MADE, THE INTERESTED PARTIES SHALL ALSO BE NOTIFIED THEREOF. (1178)

CONSIGNATION MUST BE WITH PROPER JUDICIAL AUTHORITY

 Consignation by depositing thing/sum due with proper judicial authority is needed to effect payment
 Tender of payment must be right after consignation
 Tender must be proved by debtor in proper case
 If tender not required, only prior notice to interested persons of the consignation needs to be proved

NOTICE TO BE GIVEN TO INTERESTED PARTIES OF THE CONSIGNATION MADE

 After consignation, interested parties must also be notified (this was held fulfilled by service of summons upon the
defendants together with copy of complaint)
 Purpose of second notice is to enable creditor to withdraw thing/sum deposited in case he accepts consignation

ARTICLE 1259
THE EXPENSES OF CONSIGNATION WHEN PROPERLY MADE, SHALL BE CHARGED AGAINST CREDITOR. (1179)

CREDITOR BEARS EXPENSES OF CONSIGNATION

 Consignation is necessary because of fault/unjust refusal of creditor to accept payment, therefore it should be charged
against him, chargeable to debtor if consignation is not properly made.

WHEN CONSIGNATION DEEMED PROPERLY MADE

1. Creditor accepts thing/sum deposited without objection as payment for obligation

2. Creditor questions validity of consignation, court hears and may declare it has been properly made
3. Creditor does not accept/question consignation, court hears and may cancel obligation

ARTICLE 1260
ONCE CONSIGNATION HAS BEEN DULY MADE, THE DEBTOR MAY ASK THE JUDGE TO ORDER THE CANCELLATION OF THE OBLIGATION.

BEFORE CREDITOR HAS ACCEPTED 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. (1180)

WITHDRAWAL BY DEBTOR OF THING OR SUM DEPOSITED

NOTE TO SELF Remember to reread examples in book

  All requisites of consignation operate as valid payment, therefore debtor can move for cancellation of obligation by the
court
 Debtor may withdraw the thing/sum deposited before creditor accepts consignation; before judicial declaration that
consignation was properly made as he is still the owner of the same, obligation shall remain in force (debtor pays
expenses)

ARTICLE 1261
IF THE CONSIGNATION HAVING BEEN MADE, THE CREDITOR SHOULD AUTHORIZE THE DEBTOR TO WITHDRAW THE SAME, HE SHALL LOSE
EVERY REFERENCE WHICH HE MAY HAVE OVER THE THING. THE CO-DEBTORS, GUARANTORS AND SURETIES SHALL BE RELEASED. (1181A)

EFFECT OF WITHDRAWAL WITH AUTHORITY OF CREDITOR

 Consignation is for benefit or creditor therefore he may authorize debtor to withdraw deposit after he has accepted the
same/after court issued order to cancel obligation
 Creditor-debtor relation still remain as they were before acceptance/cancellation
 Creditor shall lose every preference have may have over thing; co-debtors, guarantors, sureties shall be released
 Solidary debtor released from solidary liability, not from shares of obligation because he is still principal debtors (like
guarantors, sureties)

NOTE TO SELF Remember to reread examples in book