MODULE VIII: Extinguishment of Obligations – Payment or Performance
A. What constitutes a payment
Payment, generally, is termed as the delivery of money but in law, it may also be done
through performance like giving a thing and doing or not doing an act. Payment causes the
extinguishment of an obligation. In obligations to give a specific thing, a debtor cannot deliver
creditor other than the specific thing, even if the latter is valuable or more than valuable than the
specific thing to be delivered (Art. 1244). In obligations to give a generic thing, the debtor cannot
deliver the thing of inferior quality and neither can the creditor demand a superior quality of the
thing (Art. 1246). In obligations to do or not to do, the substitution of a thing or performance must
not be against the will of the debtor (Art. 1244). A payment is considered a donation if the third
person does not intend to be reimbursed, with the consent of the debtor.
B. Payor
The payor is labeled as someone who makes the payment. The payor can be the debtor
himself, the successor of the debtor in terms of interest, someone who is authorized by the debtor
to make the payment. A payment made by these people is valid and the creditor cannot refuse to
accept this payment. In accordance with Art. 1236, payment can also be delivered by a third
person, but the creditor has the right to refuse to accept the payment. If payment is made without
the knowledge or against the will of the debtor, the third person may only recover what has been
beneficial to the debtor. The third person may only collect the debt at the time of payment. If
payment is made with the knowledge of the debtor, the person may reimburse what he has paid
in replacement of the debtor and he can also exercise all the rights of the creditor.
C. Payee
On the other hand, the payee is the one who ought to receive the payment made by a
payor. According to Art. 1240, the payee can be the creditor himself, his successor in interest, or
any authorized person to receive it. A creditor is not the only one who can give authorization to a
person to receive the payment; the law may also authorize that person. If a payee is incapacitated,
the payment is considered invalid unless the incapacitated person kept the thing delivered and it
benefited him as well. If a third person receives the payment, the payment is also considered
invalid. A payment received by a third person can only be valid if the payment is proved to be
beneficial to the creditor.
D. Manner/Mode of payment
In terms of the manner of payment, the general rule says payment must be complete.
Partial payment is not allowed. However, there are exceptions to this rule: (1) If there is a
stipulation that debtor and creditor can make and receive partial payments, respectively. (2) In
obligations, some parts of debt require time to be determined, these are labeled to be
unliquidated. So, when a debt is partly liquidated and unliquidated, payment can be made without
waiting for the liquidation of the unliquidated part. (3) If payment is incomplete but there is
substantial compliance in good faith, the law considers the debt as paid. (4) If a creditor willingly
accepts an incomplete or irregular payment, payment is valid, and the obligation is fulfilled.
E. Special forms of payment
There are four special forms of payment: dation in payment, payment by cession,
application of payments, tender of payment and consignation.
Dation in payment is when another thing is alienated by the debtor which equivalents to
the payment of the amount due (Art. 1245). An obligation is extinguished only up to the extent of
the value of the thing. This is considered an act of novation for the debtor substituted the obligation
with a new one.
Payment by cession occurs when the debtor assigns all his properties to satisfy the
creditors. The debtor is released from his obligation only up to the net proceeds of the sale of the
properties assigned (Art. 1255). The debtor is still liable for the remaining balance if there is any.
The assignment does not make the creditors owners of the property of the debtor unless stipulated
to the contrary. The creditors only acquire and sell the thing then the proceeds will be distributed
among the creditors.
Tender of payment is when the debtor offers the creditor the thing or amount due. On the
other hand, consignation is when the debtor sends the tender of payment to the court when the
creditor refuses to accept it. Consignation is the main act for the obligation to be extinguished.
Tender of payment precedes the consignation. Art. 1256 elaborated that there are also instances
when tender of payment is no longer necessary before consignation. First, when you do not know
the creditors' whereabouts. Second, when a creditor is incapacitated to receive the payment.
Third, when the creditor refuses to give a receipt then tender of payment. Fourth, when two or
more persons claim the same right to collect the payment. Lastly, when the title of the obligation
has been lost. The objective of consignation to protect the debtor from being liable for any
damages or interest. Since the creditor refuses to accept the tender of payment, the debtor might
be liable for damages or any interest after the due date of the obligation. Through consignation,
the debtor will be relieved from the payment of any interest from the date of tender.
F. Application of Payment
Application of payments is whereby the debtor selects what debt should be paid over his
various debts of the same kind in favor of the same creditor. If the debtor does not designate his
debts, the creditor can identify what debt is being paid. Payment cannot be made to apply to debts
that are not yet due. Art. 1252 emphasized that debts must be due and demandable unless there
is a stipulation or the same is made by the party for whose benefit has been constituted. If there
is no application of payment, payment is made to the most onerous debt. If there are more than
one onerous debt, payment is divided proportionally.
G. Currency
As stated in Art. 1249, payment of debts shall be made in the currency stipulated. If not
possible to deliver such currency or there is an absence of stipulation that payment can be in the
form of a specific foreign currency, then payment can be based on the currency which is legal
tender in the Philippines.
H. Place of Payment
The general rule states that if a stipulation exists, the payment shall be made in the place
designated by the parties (Art. 1251). If a thing is specific and there is a stipulation, payment shall
be made where the specific thing was, at the perfection of the contract. If there is no stipulation,
the payment takes place in the domicile of the debtor. Expenses on the way to the debtor's place
will be shouldered by the creditor himself.
I.
Expenses/costs in payment
According to Art. 1247, the debtor is the one who is responsible to pay the extra-judicial
expenses required by the payment unless there is a stipulation as to who will bear the expenses.
On the other hand, Judicial expenses are regulated by the Rules of Court, in which the losing
party shall pay those expenses. However, judicial expenses can be shouldered by both parties If
the courts say so, considering special reasons. In consignation, expenses are billed to the creditor
mainly because of his unjust refusal to accept payment.
Sources:
Article 1232 to Article 1238 of the Civil Code of the Philippines
Article 1240 to Article 1241 of the Civil Code of the Philippines
Article 1244 to Article 1249 of the Civil Code of the Philippines
Article 1251 to Article 1256 of the Civil Code of the Philippines
Article 1259 of the Civil Code of the Philippines
De Leon H. (2014) The Law on Obligations and Contracts.
Tolentino, A. (1992) Commentaries and Jurisprudence on the Civil Code of the Philippines
Volume IV: “Obligations and Contracts”.