EXTINGUISHMENT

OF OBLIGATIONS
General Provisions
LAW

Article 1231. Obligations are extinguished:

(1) By payment or perfromance;
(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.

Other causes of extinguishment of obligations, such as

annulment, rescission, fulfillment of a resolutory condition
and prescription, are governed elsewhere in this Code.
Modes of Extinguishing Obligations. LAW

There are ten modes of extinguishing obligations enumerated in the above

article. This enumeration, however, is not complete.

(1) renunciation or waiver by the obligee or creditor;

(2) compromise;

(3) expiration of the resolutory term or period;

(4) death of one of the contracting parties in purely personal obligations;

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(5) the will of one of the
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(6) the agreement of both contracting parties or what is sometimes known

as mutual assent or dissent.
 EXTINGUISHMENT OF OBLIGATIONS
Payment or Performance
LAW
Section 1. — Payment or Performance

Art. 1232. Payment means not only the delivery of money but
also the performance, in any other manner, of an obligation.

Concept of Payment or Performance. — Historically, the term

payment has three different acceptations. In its broadest sense, it consists
in the fulfi llment of the obligation either voluntarily or involuntarily,
including its extinguishment by any means or mode whatsoever; in its
limited sense, it consists in the normal and voluntary fulfi llment of the
obligation by the realization of the purposes for which it was
constituted; in its more limited sense, it consists in the fulfi llment of the
obligation by the delivery of a sum of money. The Civil Code has
adopted the second. Hence, payment, as it is understood in the Civil
Code, means not only the delivery of money but also the performance,
in any other manner, of an obligation.
LAW Art. 1233. 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.

Art. 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 dam- ages suffered by the obligee.

Art. 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.
LAW

When Obligation Is Understood Paid or Performed. —

As a consequence of the rule stated in Art. 1233, an
obligation to give shall be understood to have been paid
when the debtor or obligor has completely delivered the
thing which he had obligated himself to deliver; an
obligation to do shall be understood to have been performed
when the obligor has completely rendered the service which
he had obligated himself to render; an obligation not to do
shall be understood to have been complied with when the
obligor has completely refrained from doing that which he
had obligated himself not to do.
LAW The above rule, however, is not absolute in character. It
is subject to the following exceptions:

(1) When the obligation has been substantially performed in

good faith. In this case, the obligor may recover as though
there has been a strict and complete fulfillment, less damages
suffered by the obligee.10 The fairness of this rule is evident.
In case of substantial performance, the obligee is benefi ted.
So the obligor should be allowed to recover as if there has
been a strict and complete fulfi llment, less damages suffered
by the obligee. This last condition affords a just compensation
for the relative breach committed by the obligor.
LAW The above rule, however, is not absolute in character. It
is subject to the following exceptions:

(2) When the obligee accepts the performance,

knowing its incompleteness or irregularity, and
without expressing any protest or objection. This rule
is based on the principle of estoppel.

There is another instance when an obligation is considered by

some to have been paid and that is when the obligation to give,
to do or not to do is converted into an obligation to indemnify
the obligee or creditor because of breach or nonfulfi llment and
the indemnity is finally paid in full.13 Strictly speaking, however,
this case falls under the general rule stated in Art. 1233.
Art. 1236. The creditor is not bound to accept payment or
performance by a third person who has no interest in the LAW
fulfillment of the obligation, unless there is 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 benefi cial to the debtor.

Art. 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.

Art. 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.
 LAW

Persons Who May Pay Obligation. — The following may

pay or perform the obligation: first, the debtor himself or his
legal representative; and second, any third person. The effect
in both cases when the payment is effected in accordance
with the requisites prescribed by law is the extinguishment
of the obligation.
Idem; Payment by a third person. — It is evident from the
provisions of Arts. 1236 to 1238 of the Code that a third person,
whether he has an interest in the obligation or not, and whether
the payment was made with the knowledge and consent of the
debtor or not, may pay the obligation. Out of this act expressly
recognized by the law, there are several juridical effects which
necessarily follow.
These effects are given in Arts. 1236 to 1237 of the Code.
These rules, however, cannot be applied to the case of a
third person who pays the redemption price in sales with right of
repurchase (pacto de retro). This is so because the vendor a retro is
not a debtor within the meaning of the law.
 OBLIGATIONS
Gonzaga vs. Garcia
27 Phil. 7
According to the records of this case, Francisco sold a parcel of land to
Martin with right of repurchase. Subsequently, by virtue of a court
judgment rendered against Francisco, the right of repurchase was
purchased by Del Rosario, the judgment creditor, at an execution sale.
Francisco, as judgment debtor, was unable to redeem the right thus
sold. Meanwhile, he paid the redemption price to the vendee a retro,
Martin, without the knowledge of Del Rosario. Later, Del Rosario sold
the right to the plaintiff Gonzaga. One of the questions that had to be
decided in this case is whether the provision of what is now Art. 1236 of
the New Civil Code is applicable or not. The Supreme Court held:

“Del Rosario was not a debtor. He was under no obligation to

repurchase the land from Martin. He had a right to do so butwhether he
exercised this right or not depended upon his own volition. Article 1158
(now Art. 1236) is not for these reasons applicable.’’
LAW

Idem; id. — Right of creditor. — Under Art. 1158 of the Spanish Civil Code, the rule was
that any person whether he has an interest in the fulfi llment of the obligation or not could
compel the creditor to accept payment. This rule has been changed in the New Civil Code.
The creditor is not bound as a general rule to accept payment or performance by a third
person. The Code Commission gives the following reasons for the change.

“Under the present law (Art. 1158, Civil Code of Spain) the creditor cannot refuse
payment by a third person, but the Commission believes that the creditor should
have a right to insist on the liability of the debtor. Moreover, the creditor should
not be compelled to accept payment from a third person whom he may dislike or
distrust. The creditor may not, for personal reasons, desire to have any business
dealings with a third person; or the creditor may not have confi dence in the
honesty of the third person who might deliver a defective thing or pay with a check
LAW
EXTINGUISHMENT OF OBLIGATIONS

There are, however, two exceptions to the rule that the creditor is not bound to
accept payment or performance by a third person. They are:

(1) When it is made by a third person who has an interest in the fulfi llment of the
obligation, such as a joint debtor, guarantor or surety. Thus, where payment is made by
a joint debtor in excess of what he should pay for the benefi t of his co-debtor, such
payment cannot be considered as a payment unduly made under Art. 2154 of the Civil
Code, but as one made by a person interested in the fulfillment of the obligation in
accordance with the provision of Art. 1236 of the said Code.

(2) When there is a stipulation to the contrary. In this case, the creditor is deemed to
have waived his right to refuse to deal with strangers to the obligation.
 Idem; id. — Rights of third person. — If a third person
pays the obligation with the knowledge and consent of the
debtor, there are two rights which are available to him. In
LAW
the first place, he can recover from the debtor the entire
amount which he has paid; and in the second place, he is
subrogated to all of the rights of the creditor. However, if
the payment is made without the knowledge or against the
will of the debtor, there is only one right which is available
to him; he can recover only insofar as the payment has been
beneficial to the said debtor.

Idem; id.; id. — Right of reimbursement. — Whether the payment is

effected with the knowledge and consent of the debtor or without his
knowledge or even against his will, the third person who made the payment
is entitled to reimbursement. The extent or amount of recovery, however, is
different in either case.
LAW If the payment was effected with the knowledge and consent of the debtor, the
third person can recover from the latter the entire amount which he has paid.25
Thus, if D is indebted to C for P10,000, and subsequently, when the debt became
due and demandable, P, a third person, paid the entire amount with the
knowledge and consent of D, P can now demand from D the reimbursement of
the entire amount of P10,000.

If the payment was effected without the knowledge or even against the will of the
debtor, the third person can recover only insofar as the payment has been
beneficial to the latter.27 It is, therefore, evident that the extent of recovery in this
case is much more limited than when payment is made with the knowledge and
consent of the debtor. The rule is both just and logical. When the third person
pays the debt or obligation without the knowledge or against the will of the
debtor, there is no reason why he can obligate the debtor to pay more than the
amount which the said debtor would have been legally compelled to pay to the
creditor.
LAW

Hence, if the debt or obligation has been previously extinguished totally by

any of the modes of extinguishment of obligations, such as payment, remission,
compensation or prescription, the third person who pays without the knowledge
or consent of the debtor would not be able to recover anything from the latter; if
the debt or obligation has been previously extinguished partially, the third person
would be able to recover only that part of the amount which he has paid which
would correspond to the part of the obligation which has not
been extinguished, because it would be only to that extent that the
payment has been benefi cial to the debtor. In both cases, the remedy
of the third person would be to proceed, not against the debtor who
has not been benefi ted by the payment, but against the creditor who
was unduly paid applying the principle that no person can unjustly
enrich himself at the expense of another.
LAW

It must be noted that from the viewpoint of the debtor, the provision
of the law that the third person or payor “can recover only insofar as the
payment has been beneficial to the debtor,” when made against his
express will, is a defense which may be availed of by the debtor only and
not by the creditor, for it affects solely the rights of the former. At any
rate, in order that the rights of the payor may be subject to said
limitation, the debtor must oppose the payment before or at the time the
same was made, and not subsequent thereto.
LAW EXTINGUISHMENT OF OBLIGATIONS
Payment or Performance

Idem; id.; id. — Right of subrogation. — If the payment

was effected with the knowledge and consent of the
debtor, the third person who made the payment shall be
subrogated to all of the rights which the creditor could
have exercised, not only against the debtor, but even
against third persons. The right is expressly recognized in
Art. 1302 of the Code; it can also be deduced from the
provision of Art. 1237. If the payment, however, was
effected without the knowledge or against the will of the
debtor, the third person who made the payment cannot
compel the creditor to subrogate him in his rights, such as
those arising from a mortgage, guaranty, or penalty.
LAW EXTINGUISHMENT OF OBLIGATIONS
Payment or Performance

It must be noted that the right of subrogation is not the

same as the right of reimbursement, although it includes
the latter. Subrogation is a right available to the third
person or payor, whereby he is entitled, not only to
demand reimbursement from the debtor, but also to
exercise all of the rights which the creditor could have
exercised against the debtor and against third persons,
such as those arising from a mortgage, a guaranty, or a
penalty. Reimbursement, on the other hand, is merely a
simple personal action available to the third person or
payor against the debtor to recover from the latter what
he has paid insofar as the payment has been beneficial to
the said debtor.
 LAWYER

Problem No. 1 — In 1972, D executed a promissory note promising to pay to C

P10,000 within a period of four years. The payment of the debt was guaranteed by
G. In 1976, P, a third person, paid the entire amount of the indebtedness with the
knowledge and consent of D. What are the respective rights and obligations of the
parties?

Answer — P shall be subrogated to all of the rights of C, not only

against D, but also against G. This is so, because the law expressly
states that if a third person pays the obligation with the express or tacit
approval of the debtor, he shall be legally subrogated to all of the
rights of the creditor, not only against the debtor, but even against
third persons, be they guarantors or possessors of mortgages.
Consequently, P can demand reimbursement from D of the P10,000
which he had paid to C. If D cannot pay because of insolvency, he
can still proceed against G for the recovery of the amount.
 LAWYER

Problem No. 2 — If in the above problem, C had condoned one-half of the

obligation in 1975, and subsequently, in 1976, P, unaware of the partial remission of
the indebtedness, paid, without the knowledge and consent of D, the entire amount
of P10,000 to C, who accepted it, what would be the effect of such payment upon
the rights and obligations of the parties?

Answer — With respect to D, the only right which P has

against him is to recover P5,000, because, it is only to that extent
that he had been benefi ted by the payment.34 With respect to
G, if D cannot pay the P5,000 because of insolvency, P can no
longer proceed against him, because the payment was made
without the knowledge and consent of D, and consequently, he
cannot be subrogated to the rights of C against G. With respect
to C, however, undoubtedly, P can still proceed against him for
the recovery of P5,000, applying the principle that no person can
unjustly enrich himself at the expense of another.
Art. 1236. The creditor is not bound to accept payment or
performance by a third person who has no interest in the LAW
fulfillment of the obligation, unless there is 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 benefi cial to the debtor.

Art. 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.

Art. 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.
LAW Idem; id. — Gratuitous payments.

— If the payment is made by a third person who does not

intend to be reimbursed by the debtor, the presumption arises
that such payment is a donation. Therefore, the debtor’s
consent is necessary, as in the case of the done in ordinary
donations. Once the debtor’s consent is secured, then the
rules on ordinary donations will apply. If such consent,
however, is not secured, the rules stated in Arts. 1236 and
1237 will still apply. As far as the creditor who has accepted
the payment is concerned, the debtor’s consent is immaterial;
the payment is valid in any case.
 LAW

Art. 1239. In obligations to give, payment made

by one who does not have the free disposal of the
thing due and capacity to alienate it shall not be
valid, without prejudice to the provisions of
Article 1427 under the Title on “Natural
Obligations.’’

Capacity To Make Payment.

It is, of course, essential that the person who pays the

obligation should have the necessary legal capacity to
effect such payment. This is especially true in
obligations to give. In such case, it is essential for the
validity of the payment that the payor should have the
free disposal of the thing due and the capacity to
alienate it. The absence of one or the other will affect
the validity of the payment.
 LAW

Capacity To Make Payment.

Consequently, if the payment was effected by a person who does not have the
free disposal of the thing due and/or the capacity to alienate it, as in the case of a
minor or an insane person, such payment is not valid. In other words, even if the
creditor has already accepted it, it may still be annulled by a proper action in court at
the instance of the payor or his legal representative, unless it falls within the purview
of the exception expressly provided for in Art. 1427 of the Code. However, from the
viewpoint of the obligation itself, a certain qualification must be made. If an
incapacitated person offers to pay the obligation and the creditor refuses to accept the
payment because he is aware of the payor’s incapacity, the obligation still subsists.
Such creditor cannot be compelled to accept the payment; as a result, consignation of
the thing due is not possible.
 LAW

Art. 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.

To Whom Payment Must Be Made. — Payment shall be made, as a general rule, to (1) the
person in whose favor the obligation has been constituted, or (2) his successor in interest, or
(3) any person authorized to receive it. Under the old Code, the second was not included in the
enumeration; in spite of the omission, however, the first, according to Manresa, includes not only
the person who was the creditor at the time of the constitution of the obligation, but also the person
who is the creditor at the time of payment. This is so, because, although the obligation was not
constituted in favor of the latter, in the last analysis, it was constituted for his benefit. In order to
resolve all doubts with respect to this point, the Code Commission has added the second (successor-
in-interest) to the original provision of the Spanish Civil Code. The third, on the other hand, refers
to any person expressly or impliedly authorized by the creditor himself or by law.
 LAW
Idem; Persons authorized to receive payment.

— As stated in the preceding section, the person authorized to receive the payment
refers not only to a person authorized by the creditor, but also to a person authorized
by law to do so. Thus, payment made to a guardian, or to the executor or
administrator of the estate of a deceased person, or to the assignee or liquidator of a
partnership or corporation is payment made to a person authorized by law to receive
it and, consequently, is valid.
The above interpretation of the phrase “any person authorized to receive payment is
best illustrated by those cases decided by our courts after liberation involving the
validity of payments made to the Bank of Taiwan during the war. It must be
remembered that during the occupation, enemy properties (properties belonging to
nationals of countries at war with Japan) were sequestered by order of the
Commander-in-Chief of the Japanese Imperial Forces in the Philippines in
accordance with the theory that a belligerent occupant has the power to take by
sequestration not only public property but also private property of the enemy in an
occupied territory.
 LAW
Idem; Persons authorized to receive payment.

These properties were given to the Enemy Property Custodian for liquidation with
the Bank of Taiwan as depository. The question then is — if the debtor had incurred
an indebtedness from a certain enemy bank before the war and payment was made to
the Bank of Taiwan as liquidator of the said bank at any time during the Japanese
occupation, is the payment valid? This question was answered in the affi rmative by
the Supreme Court for the first time in the leading case of Haw Pia vs. China
Banking Corporation. In said case, the Court held:
“It having been shown x x x that the Japanese Military Forces had power to
sequestrate and impound the assets or funds of the China Banking Corporation, and
for that purpose to liquidate it by collecting the debts due to said bank from its
debtors, and paying its creditors, and therefore to appoint the Bank of Taiwan as
liquidator with the consequent authority to make the collection, it follows evidently
that the payments by the debtors to the Bank of Taiwan of their debts to the China
Banking Corporation have extinguished their obligation to the latter.
 LAW
Idem; Persons authorized to receive payment.

Said payments were made to a person, the Bank of Taiwan, authorized to

receive them in the name of the bank credit or under Article 1162 (now
Art. 1240) of the Civil Code, because it is evident that the words ‘a person
authorized to receive it,’ as used therein, means not only a person
authorized by the same creditor but also a person authorized by law to do
so.’’
LAW Idem; id. — Payment to unauthorized persons.

— If the payment is made to a person other than those

enumerated in Art. 1240, it shall not be valid. Thus,
where an electric plant was sold and delivered by the
plaintiff to the defendant and the latter subsequently paid
the purchase price, without the knowledge of the former,
to a certain person who represented himself as the
plaintiff’s agent, it was held that the defendant had no
right to assume that such person was authorized to
receive the money; consequently, said defendant made
the payment at his own risk and can still be held liable for
the purchase price.
LAW Idem; id. — Payment to unauthorized persons.

This conclusion is strengthened by the fact that in

agency, an assumption of authority to act as agent for
another of itself challenges inquiry.49 Similarly,
where the decedent during his lifetime had assigned
the right to collect a certain credit to his children by a
prior marriage, and subsequently, the debtor, with
knowledge of the assignment, paid the debt to the
decedent’s second wife, it was held that such payment
is void on the ground that it was made to a person
not authorized to receive the payment.
LAW Idem; id. — Payment to unauthorized persons.

The same conclusion can also be applied to the act of the

vendee in depositing the balance of the purchase price at the
Philippine National Bank in the name of the vendor when
he could not locate the latter because of the conditions then
existing in January, 1945, when the payment became due.
Although the payment is not valid because it is not made to
a person authorized to receive it in accordance with the
provision of Art. 1240 of the Code, nevertheless it is clear
that the vendee had acted in good faith; he cannot,
therefore, be said to have incurred in delay; consequently,
the vendor cannot ask for the
rescission of the contract.
Idem; id. — Exceptions. LAW

— There are, however, two exceptions to the rule that

payment made to a person other than those enumerated
in Art. 1240 is not valid. They are: first, payment made
to a third person, provided that it has redounded to the
benefit of the creditor, and second, payment made to the
possessor of the credit, provided that it was made in
good faith.
Art. 1241. Payment to a person who is
incapacitated to administer his property
shall be valid if he has kept the thing
delivered, or insofar as the payment has
been beneficial to him.

(1) If after the payment, the third person

Payment made to a third person shall also acquires the creditor’s rights;
be valid insofar as it has redounded to the
(2) If the creditor ratifies the payment to
benefit of the creditor. Such benefit to the
creditor need not be proved in the the third person;
following cases: (3) If by the creditor’s conduct, the debtor
has been led to believe that the third person
had authority to receive the payment.
LAW

Payment to Incapacitated Persons.

According to the above article, if payment is made to a

person who is incapacitated to administer his property, the
payment is considered valid: (1) if he has kept the amount
or thing paid or delivered, or (2) insofar as the payment has
been beneficial to him. It is evident that if the incapacitated
person has kept or preserved the amount or thing paid or
delivered, the act is benefi cial to him; hence, the fi rst case
is actually included in the second.
 LAW
Payment to Incapacitated Persons.

When the law says that the payment, in order to be valid, must have been
benefi cial to the incapacitated person, it does not literally mean that the
amount or thing paid or delivered should have been invested by such
incapacitated person or used for expenses. The payment is benefi cial to him
when that which has been paid or delivered is applied or spent for some
rational, necessary or useful purpose for his benefit. Otherwise, the payment is
not valid, and as a consequence, the debtor may be made to pay again either at
the instance of the incapacitated person upon recovering or acquiring capacity
or at the instance of the legal representative of such person during such
incapacity.
It must be noted that the rule is applicable only to obligations to give.
 LAW

Payment to Third Persons.

If the payment is made to a third person, the rule is that it shall be valid insofar as
it has redounded to the benefi t of the creditor. This rule constitutes an exception
to the general rule stated in Art. 1240. As in the case of the preceding rule, it is
applicable only to obligations to give.

It must be observed, however, that in order that the payment shall be valid, it is
essential that it should have redounded to the benefit of the creditor.
Consequently, the rule cannot be invoked without conclusive proof of the benefi
t to the creditor, especially when there is not the slightest evidence that the third
person to whom payment was made had any claim to the creditor’s right.
 LAW

Payment to Third Persons.

It cannot, therefore, be presumed except in the three cases specified in

the second paragraph of Art. 1241. Thus, even granting that the
payment to a third person was made through mistake and in good faith,
the debtor can still be held liable. If it becomes impossible for such
debtor to recover what was unduly paid, any loss resulting therefrom
shall be borne by him unless there is a stipulation to the contrary, or
unless the creditor himself was responsible for the wrongful payment.
 LAW
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