Art.

1231
Obligations are extinguished:
(1) By payment or performance:

(2) By the loss of the thing due:

(3) By the condonation or remission of the debt;

(4) By the confusion or merger of the rights of creditor and debtor;

(5) By compensation;

(6) By novation.

Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a

resolutory condition, and prescription, are governed elsewhere in this Code. (1156a)

SECTION 1. - Payment or Performance

Other causes of Terminating Obligation​:

1. Waiver or Renunciation
2. Mutual Agreement
3. Compromise
4. Fulfillment of Resolutory Condition (Art. 1179)
5. Expiration of Resolutory Term (Art 1139)
6. Prescriptio/Prescription
7. Death of the debtor when the obligation is purely personal
8. Decision or will of one of the parties in certain contracts like agency, partnership
9. Happening of unforeseen events
10. Abandonment of the property charged with an obligated

Art. 1232
Payment means not only the delivery of money but also the performance, in any other manner,
of an obligation. (n)
Payment is that mode of extinguishing obligation which is consists of:
- The delivery of money, or
- The performance in any other manner of an obligation
(example: rendition of the required service)

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. (1157)
- Debt - an obligation to deliver money/a thing/ to do an act
When debt is considered paid:
- Integrity of prestation - a debt is 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
- Identity of the prestation​ - the very prestation due must be delivered/performed

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 damages suffered by the obligee.
(n)

Recovery allowed in case of substantial performance in good faith

This article if the first exception to Article 1233 because:
- Adopted from American Law
- Incase of substantial performance, obligee is benefied
- Obligor should be allowed to recover(as if there 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

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. (n)
Recovery allowed when incomplete or irregular performance is waived
(this is another exception to article 1233 and founded on the principle of estoppel)
- If payment irregular/complete, creditor may reject
- If creditor accepts, the right must be waived, then obligation is extinguished
Requisites for application of article 11235
1. The obligee knows that the performance is incomplete/irregular
2. He accepts performances without expressing protest/objection

Art. 1236
The creditor is not 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 interest in the obligation
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 third person
The Creditor is only making sure, that's why the creditor may not accept payment from a third
person.

Effect of payment by third person

*Payment or performance may be made by any person not incapacitated, even w/o the
knowledge or against will of debtor and although he has absolutely no interest in obligation
1. If made w/o 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 the right of reimbursement
and subrogation (to recover what he has paid - not necessarily the amount of the debt,
and acquire all rights of 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. (1159a)
Right of third person to subrogation
- Whoever pays in behalf of debtor is entitled to subrogation if payment is with consent of
latter.
- If payment is w/o 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
the shoes of the creditor
● Payor acquires not only right to
reimburse what he has paid but also
all other rights creditor could have
exercised (credit against debtor or
against third person - guarantors or
possessors of mortgages )
● There is no real extinction of
obligation, only change of creditor
● Third person entitled by reason of
payment has merely the bare right to
be refunded (only to extent of article
1236) this is without right to the
guarantees and securities of original
obligation

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. (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
an 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

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." (1160a)
● Consignation will not be proper here. In case the creditor accepts the payment will not be
valid except in the case provided in 1427

Difference between “free disposal of the thing due” and “capacity to alienate”
1. Free disposal of the thing due​ means that the thing to be delivered must not be subject
to any claim or lien or encumbrance of a third person (e.g. mortgage, pledge)
2. Capacity to alienate​ means that the person is not incapacitated to enter into contracts
and for that matter, to make a disposition of the thing due.
Free disposal of thing due and capacity to alienate required
As a general rule, in obligations to give, payment by one who does not have the free
disposition of the thing due and capacity to alienate it is not valid. This means the that
the thing paid can be recovered.

Example: S agreed to sell to B a television set. If the television set delivered to B by S

belongs to C, the same can be recovered by C because the payment is not valid. S does
not have free disposal of the television set

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. (1162a)

● The authority of a person to receive payment to receive payment for the creditor may be:
1. Legal - conferred be the law (e.g., guardian of an incapacitated, administrator of
the estate of the deceased)
2. Conventional - when the authority has been given by the creditor himself (e.g.,
agent who is appointed to collect from the debtor
● payment made by the debtor to a wrong party does not extinguish the obligation as to
the creditor (void), if there is no fault or negligence which can be imputed to the latter
(even when the debtor acted in utmost good faith, or through error induced by the fraud
of the 3rd person). It does not prejudice the creditor and the accrual of interest is not
suspended by it.

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.

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 be proved in the following cases:

(1) If after the payment, the third person acquires the creditor's rights;

(2) If the creditor ratifies the payment to the third person;

(3) If by the creditor's conduct, the debtor has been led to believe that the third person had
authority to receive the payment. (1163a)
● payment shall be considered as having benefited the incapacitated person if he made an
intelligent and reasonable use thereof, for purposes necessary or useful to him, such as
that which his legal representative would have or could have done under similar
circumstances, even if at the time of the complaint the effect of such use no longer exists
(e.g., taxes on creditor’s property, money to extinguish a mortgage on creditor’s
property)
 ● the debtor is not released from liability by a payment to one who is not the creditor nor
one authorized to receive the payment, even if the debtor believed in good faith that he
is the creditor, except to the extent that the payment inured to the benefit of the creditor
● in addition to those mentioned above, payment to a third person releases the debtor:
a.) when, without notice of the assignment of credit, he pays to the original creditor
b.) when in good faith he pays to one in possession of the credit
● even when the creditor receives no benefit from the payment to a third person, he
cannot demand payment anew, if the mistake of the debtor was due to the fault of the
creditor

Art. 1242
Payment made in good faith to any person in possession of the credit shall release the debtor.
(1164)
● the person in possession of the credit is neither the creditor nor one authorized by him to
receive payment, but appears under the circumstances of the case, to be the creditor.
He appears to be the owner of the credit, although in reality, he may not be the owner
(e.g., an heir who enters upon the hereditary estate and collects the credits thereof, but
who is later deprived of the inheritance because of incapacity to succeed)
● it is necessary not only that the possession of the credit be legal, but also that the
payment be in good faith

Art. 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)
● the payment to the creditor after the credit has been attached or garnished is void as to
the party who obtained the attachment or garnishment, to the extent of the amount of the
judgment in his favor.
● The debtor upon whom garnishment order is served can always deposit the money in
court by way of consignation and thus relieve himself from further liability

Art. 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 the
obligee's will. (1166a)
● Upon agreement of consent of the creditor, the debtor may deliver a different thing or
perform a different prestation in lieu of that stipulated. In this case there may be dation in
payment or novation
● The defects of the thing delivered may be waived by the creditor, if he expressly so
declares or if, with knowledge thereof, he accepts the thing without protest or disposes
of it or consumes it
Art. 1245
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)
● This is the delivery and transmission of ownership of a thing by the debtor to the creditor
as an accepted equivalent of the performance of the obligation.
● The property given may consist not only of a thing but also of a real right (such as a
usufruct)
● Considered as a novation by change of the object
● Where the debt is money, the law on sale shall govern; in this case, the act is deemed to
be a sale with the amount of the obligation to the extent that it is extinguished being
considered as price
● Difference between Dation and Cession (see Art. 1255)

Art. 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)
● If there is disagreement between the debtor and the creditor as to the quality of the thing
delivered, the court should decide whether it complies with the obligation, taking into
consideration the purpose and other circumstances of the obligation
● Both the creditor and the debtor may waive the benefit of this article
● see Art. 1244

Art. 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)
● GENERAL RULE - Debtor pays generally for extrajudicial expenses. Why? Because the
payment is his duty and it inures to his benefit that he is released from the burden of the
obligation.
● EXCEPTION - When there is stipulation to the contrary.
● The Judicial costs are governed by the Rules Of Court, principally Rule 142.

Art. 1248
Unless there is an express stipulation to that effect, the creditor cannot be compelled partially to
receive the prestations in 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 the liquidation of the
latter. (1169a)
● GENERAL RULE - Performance Should be generally be complete. Under Art. 1233 of
the Civil Code, 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. Hence, partial performance is not allowed generally under Art. 1248.
● Exceptions (when partial performance is allowed)
1. When there is stipulation to this effect
2. When the different prestations are subject to different conditions or different
terms
3. When a debt is in part liquidated and in part unliquidated, in which case
performance of the liquidated part may be insisted upon either by the debtor or
the creditor.
4. When a joint debtor pays his share or the creditor demands the same - This is a
complete payment of his share, but it is still a partial fulfillment of the whole
obligation.
5. When a solidary debtor pays only the part demandable because the rest are not
yet demandable on account of their being subject to different terms and
conditions
6. In case of compensation, when one debt is larger than the other, it follows that a
balance is left.
7. When work is to be done by parts.

Art. 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 in the currency which is 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 the abeyance.
(1170)
● Legal tender refers to the currency which may be used for payments of debts whether
public or private, and which the creditor cannot refuse to accept. In the Philippines, the
legal tender covers all notes and coins issued by the Central Bank of the Philippines.
● Under Presidential Decree No. 72, effective November 29, 1972, there is a limit in the
use of coins as legal tender to release the creditor from the burden of counting huge
amounts of money in coins. The creditor will find it troublesome not only to count them,
but also to carry them. So, he may not accept coins as payment beyond what the law
allows.
1. 1 centavo coins and 5 centavo coins are legal tender up to P20.00.
2. Other coins (.10, .25, and P1) are legal tender up to P50.00
3. Paper bills or money issued by the Central Bank are valid legal tenders for any
amount unlike coins.
● Examples of negotiable documents are checks, promissory notes payable to order or
bills of exchange are not considered as legal tenders. Therefore, the creditor has the
 right to refuse acceptance of these documents as payment, even if they happen to be
good. The law says that these papers shall produce the effect of payment only when
they have been encashed.
● Exceptions to the above rule
1. When a manager’s check was consigned with the court which the clerk of court
endorsed to the Provincial Treasurer and which then honored by the bank and
credited to the treasurer’s account.
2. When the creditor has accepted the debtor’s check for the repurchase of the
latter’s property, the former cannot, the following day refuse to accept the check
anymore as payment. The creditor is under estoppel having induced the debtor to
believe that he had consented such form of payment.
3. When after the payment of the check in court the vendor a retro, the vendee a
retro petitioned the court to allow him to withdraw the amount in deposit, the
payment in check is valid.
4. When the check had lost its value due to the fault of the creditor, such when he
unreasonably delayed the presentation of the check with the drawee bank for
payment, the payment in check is valid.
5. When the foreign bill of exchange lost its value for the reason that the creditor
had neglected to make a protest. Had there been a timely protest, the debtor
could have pursued the right of recourse against the parties who are secondarily
liable.

Art. 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)
● The inflation or deflation in this case must be extraordinary, meaning it is not a universal
trend which did not spare the country.
● Extraordinary inflation exists when there is a decrease or increase in the purchasing
power of the Philippine currency which is unusual of beyond the common fluctuation on
the valued of said currency, and such increase or decrease could not have been
reasonably foreseen or was manifestly beyond the contemplation of the parties at the
time of the establishment of the obligation.
● This provision only applies in extraordinary deflation or inflation. Hence, to distinguish it
from ordinary deflation or inflation, there must be an official pronouncement or
declaration by competent authorities of the existence of extraordinary inflation during a
given period. Absent such, this provision does not apply.
● Although this provision speaks of obligation, it does not apply to all obligations but only
to contractual obligations. It cannot be applied to obligations arising from torts.
Art. 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.

These provisions are without prejudice to venue under the Rules of Court. (1171a)
● Venue - the place where a court suit or action must be filed or instituted
● Domicile - the place of a person’s habitual residence, the place where they have his true
fixed permanent home, the place which they, whenever absent, have the intention of
returning
○ Residence is only an element of domicile, and only requires bodily presence as
an inhabitant in a given place.
○ Domicile is the legal residence, which requires bodily presence and and intention
to make it one’s domicile.
● Rules regarding the place for payment
1. If there is a stipulation, the payment shall be made in the place designated
2. If there is a stipulation and the thing to be delivered is specific, the payment shall
be made at the place where the thing was, at the perfection of the contract
3. If there is no stipulation and the thing to be delivered is generic, the place of
payment shall be the domicile of the debtor
■ In this case, the creditor bears the expenses in going to the debtors place
to accept payment

Extinguishment of Obligations By Payment or Performance​ (Articles 1231-1251)

● Like obligee and creditor, payment and performance are twin terms. Payment refers to
obligations to give while performance refers to obligations to do.
● Payment and performance is the paradigmatic mode. When obligations are entered into,
the parties expect payment or performance. All other modes of extinguishing obligations
are abnormal modes.
● Requisites of Payment
A. As to prestation
i. Identity - means that the very obligation must be performed.
○ For example, if the obligation is to give a car, one cannot fulfill the
obligation pay giving a house.
○ If the prestation is specific, the debtor must give or deliver the
specific thing which was agreed upon (Article 1244).
 ○ If the prestation is generic, the creditor cannot demand a thing of
superior quality. However, the debtor cannot give a thing of inferior
quality (Article 1246).
○ The payment of debts in money shall be made in the currency
stipulated, and if it not possible to deliver such currency, then in
the currency which is legal tender in the Philippines (Article 1249,
1st paragraph) - R.A. No. 529 has been repealed by R.A. No.
8183 which allows payment in different currency. However, in the
absence of an agreement, payment shall be made in Pesos.
○ Exceptions to the Requirement of Identity
1. Dacion en pago (Article 1245) (Dation)
2. Novation
ii. Integrity - means that the entire obligation must be performed aka
completeness (Article 1233)
○ Exceptions to Integrity
1. Substantial compliance in good faith (Article 1234)
2. Waiver (Article 1235) - accepting the performance knowing
its incompleteness or irregularity without expressing any
objection
3. In application of payments if the debts are equally onerous
(Article 1254, 2nd paragraph)
iii. Indivisibility - means that the obligor must perform the obligation in one
act and not in installments (Article 1248). The creditor can validly refuse if
the performance is not in one act.
○ Exceptions to Indivisibility (Cases when the law allows installment
performance)
1. In case of express stipulation (Article 1248)
2. In prestations which necessarily entail partial performance
(Article 1225, 2nd paragraph)
3. If the debt is liquidated in part and unliquidated in part
(Article 1248)
4. In joint divisible obligations (Article 1208)
5. In solidary obligations when the debtors are bound under
different terms and conditions (Article 1211)
6. In compensation where there is a balance left (Article
1290)
7. If the work is to be delivered partially, the price or
compensation for each part having been fixed (Article
1720)
8. In case of several guarantors who demand the right of
division (Article 2065)
9. In case of impossibility or extreme difficult of a single
performance
B. As to the parties
i. Payor, Obligor, Debtor
○ Who may be the Payor
1. Without the consent of the creditor
■ The debtor himself
■ The debtor‘s heirs or assigns
■ The debtor‘s agent
■ Anyone interested in the fulfillment of the obligation
(ex: guarantor)
2. With the consent of the creditor
■ Anyone can pay if the creditor consents
○ Effect of Payment by a 3rd Person
1. Payment was with the Debtor‘s Consent
■ General Rule: The payor steps into the shoes of the
creditor and becomes entitled not only to recover
what he has paid, but also to exercise all the rights
which the creditor could have exercised –
subrogation (Articles 1236, 1237).
■ There is no extinguishment of the obligation but a
change in the active subject.
■ Exception: No subrogation if intended to be a
donation (Article 1238).
2. Payment was without the Debtor‘s Consent
■ The 3rd person may demand repayment to the
extent that the debtor has benefited (Article 1236,
2nd paragraph)
ii. Payee, Obligee, Creditor
○ Who may be the Payee
1. The creditor himself (Articles 1240, 1626)
2. The creditor‘s successor or transferee (Article 1240)
3. The creditor‘s agent (Article 1240)
4. Any third person subject to the following conditions:
■ Provided it redounded to the creditor‘s benefit and
only to the extent of such benefit (Article 1241, 2nd
par)
■ If it falls under Article 1241 paragraph 2, (1), (2)
and (3), the benefit is total.
5. Anyone in possession of the credit (Article 1242)
6. In all these 5 instances, it is required that the debt should
not be garnished (Article 1242). If there is payment despite
garnishment, then there is no payment.
C. As to the time and place of performance
i. When Payment Should be Made
 ■ Payment should be made when it is due.
■ Even if the payment is due, the General Rule is that demand is still
necessary.
■ Article 1169 provides the instances when demand is not
necessary
1. When the obligation or the law expressly so declares
2. Time is the controlling motive for the establishment of the
contract
3. Demand would be useless
ii. Where Payment Should be Made:
■ Primary Rule: Agreement of the parties
■ Secondary Rule: Place where the thing was at the time the
obligation was constituted if the obligation is to deliver a
determinate thing
■ Tertiary Rule: Debtor‘s domicile (not residence)

SUBSECTION 1. - Application of Payments

Art. 1252
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 same 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 yet 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 invalidating the contract.
(1172a)
● Application of Payments - It is the designation of the particular debt being paid by a
debtor who has two or more debts or obligations of the same kind in favor of the same
creditor to whom the payment is made.
● GENERAL RULE - Right to make application of payments primarily to the debtor
○ The debtor has the right to choose which of the several due shall be paid. The
right belongs primarily to the debtor. But, there is a proper time for the
designation of the payment. It must be made at the moment of payment.
○ The creditor may have the right to apply to which of the several debts the
payment was made by issuing receipts, if the debtor failed to exercise his right.
The payment is deemed applied to the specific indebtedness mentioned in the
receipt, if the debtor has accepted the receipt without objection.
● Requisites for a valid application of payments by the debtor
1. There is only one debtor and one creditor
2. The debtor owes the creditor two or more debts which are of the same kind or
identical specie
3. All the debts are due and demandable
 4. The payment made by the debtor is not sufficient to cover or settle all the debts.
● Requisites for a valid application of payments by the creditor
1. The debtor did not make any designation on which debt should be paid when he
made the payment
2. The creditor issued a receipt expressing the application of the payment to a
particular debt
3. The debtor assented to the application of the payment to a particular debt.
● Limitation of the preferential right of the debtor to choose the debt to be paid
1. The debtor cannot apply to a debt not yet liquidated or due
2. If the creditor is given a benefit of the period or term, which has not yet arrived,
an application of payment cannot be made by the debtor
3. If there is a specific agreement as to which debts shall be paid first, the debtor
cannot vary the agreement without the consent of the creditor
4. If there is principal obligation which bears interests, the debtor cannot pay the
interest without first paying the principal
5. A debtor cannot choose to pay a bigger debt partially, when the payment made
can be applied as full payment to a smaller debt.
Art. 1253
If the debt produces interest, payment of the principal shall not be deemed to have been made
until the interests have been covered. (1173)
● The rule in this article is mandatory.
● The debtor cannot choose to credit his payment to the principal before the interest is
paid.
● The payment must be applied first to the interest and whatever balance is left can be
credited to the principal.
● The creditor can refuse an application of the debtor made contrary to this article.
● However, this rule is subject to any agreement between the parties, or to waiver by the
creditor.

Art. 1254
When the payment cannot be applied in accordance with the preceding rules, or if application
can not 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)

Special Forms of Payments - As to Application of Payment ​(Articles - 1252-1254)

● Application payment is the designation of the debt which is being paid by a debtor who
has several obligations of the same kind in favor of the creditor to whom payment is
made.
● The situation in application of payments is that a debtor owes his creditor. There are
several debts due, but the debtor cannot pay all of the debts due.
 ○ Example: A owes B P2000, P3000 and P10,000. A gives B P15,000. There is no
application of payment here because it is equal to the total amount due.
● The creditor can always not accept application of payments since the creditor cannot be
compelled to accept partial performance of the obligation. However, this may not be wise
since the debtor may have other creditors.
● The rules on application of payment solve the problem of distributing the payment which
is less than the total obligation.
● Rules in Application of Payment
○ 1st Rule: Apply in accordance with the agreement
○ 2nd Rule: If there is no agreement, the debtor has the right to apply
○ 3rd Rule: If the debtor does not choose, the creditor can choose.
○ 4th Rule: Apply to the most onerous debt (Article 1254, paragraph 1)
■ Rules to Determine Which is the More Onerous Obligation
1. An interest bearing obligation is more onerous than a non-interest bearing
obligation.
2. A debt as a sole debtor is more onerous than a non-interest-bearing debt
even if the latter is an older one
3. Of 2 interest bearing debts, the one with a higher rate is more onerous
4. An older debt is more onerous than a recent debt
5. An obligation where the party is bound as a principal is more onerous
than an obligation is bound as a surety
6. An obligation which is secured (by mortgages or by pledge) is more
onerous than an obligation which is unsecured
7. An obligation with a penal clause is more onerous than an obligation
without a penal clause
○ 5th Rule: If equally onerous (or subject to different burdens ex: one secured by a
mortgage and another by a penalty clause), apply proportionately (Article 1254,
paragraph 2)

SUBSECTION 2. - Payment by Cession

Art. 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
1. There must be 2 or more creditors
2. The debtor must be partially solvent
3. The assignment must involve all the properties of the debtor
4. The cession must be accepted by the creditors
Special Forms of Payments - As Payment By Cession ​(Article 1255)
● In payment by cession, property is turned over by the debtor to the creditors who acquire
the right to sell it and divide the net proceeds among themselves.
● The situation is contemplated here is that the debtor has several creditors and several
debts. He turns over property to his creditors who are given the authority to sell the
property and to apply the proceeds to his debt.
● In payment by cession, the creditors do not own the property to be sold. The creditors
only have the power to sell. The net proceeds of the sale will be distributed according to
the agreement.
○ They only own the property if there is a stipulation allowing this
○ If there is still remaining balance after all the properties are sold, there is still a
liability
● Payment by cession is a special form of payment because there is no completeness of
performance – integrity. In most cases, there will be a balance due.
● Payment by Cession Distinguished from Dacion en Pago

Criteria Dation/Dacion en Pago Cession

Number of Creditors Usually only 1 creditor At least 2 creditors

Insolvency of Debtor Does not presuppose Insolvent by the time of

assignment

Property of Debtor Does not involve all the Involves all personal property
property

Transfer of Ownership There is a transfer of There is no transfer of

ownership ownership - creditors only sell

Termination of Debts No Liability remains Liability remains if there is

balance

Act of Novation ✓
● Both are substitute forms of payment or performance
● Payment by cession must be distinguished from insolvency.
○ 2 Kinds of Insolvency
1. Extrajudicial or Voluntary
■ In extrajudicial insolvency, if there is a balance left, the debtor
must still pay.
■ However, the debtor may limit which properties will be sold by the
creditors since the agreement is contractual.
2. Judicial
■ In judicial insolvency, the obligation is totally extinguished even if
there‘s still a balance.
 ■ In judicial insolvency, every property which is not exempt from
attachment or execution is made available for sale.

SUBSECTION 3. - Tender of Payment and Consignation

Art. 1256
If the creditor to whom tender of payment has been made refuses without just cause to accept
it, the debtor shall be released from responsibility by the 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, he refuses to give a receipt;

(4) When two or more persons claim the same right to collect;

(5) When the title of the obligation has been lost. (1176a)
● Tender of payment - the act on the part of the debtor of offering to the creditor the thing
or amount due
○ The debtor must show that he has in his possession the thing or money to be
delivered at the time of the offer
● Consignation - the act of depositing the thing or amount due with the proper court when
the creditor does not desire or cannot receive it, after complying with the formalities
required by law
○ Applicable when there is a debt or obligation to pay
○ Always judicial and generally requires a prior tender of payment (which is by its
nature extrajudicial)
● Requisites of a valid consignation:
1. Existence of a valid debt which is due (Article 1256, paragraph 1)
2. Tender of payment by the debtor and refusal without justifiable reason by the
creditor to accept it
3. Previous notice of consignation to persons interested in the fulfillment of the
obligation (Article 1257, paragraph 1)
4. Consignation of the thing or sum due (Article 1258, paragraph 1)
5. Subsequent notice of consignation made to the interested parties
● In all 5 cases mentioned in paragraph 2, tender of payment is not necessary before the
debtor can consign the thing due with the court
● A creditor who, without legal justification, informs his debtor that payment of a debt will
not be accepted thereby waives payment on the date when the payment is due
○ The debtor is consequentially excused from making a formal tender of the money
on such a date
 ● A debtor does not incur default by failing to make a fruitless tender after notification from
the creditor (that the money will not be received)
● Requirements for valid tender of payment:
1. Tender of payment must comply with the rules of payment (Articles 1256-1258)
or with the terms required in the contract
■ The tender does not by itself produce legal payment, unless it is
completed by consignation
2. It must be unconditional and for the whole amount due in legal tender
3. It must be actually made
■ The manifestation of mere desire or intention to pay is not enough
■ The debtor must show present ability to perform by an actual offer of the
thing or money due

Art. 1257
In order that the consignation of the thing due may release the obligor, it must first be
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)
● Absence of prior notice to the persons interested in the fulfillment of the obligation makes
the consignation as payment void
○ Persons interested can be guarantors, mortgagees, solidary debtors, solidary
creditors
● Purpose of the notice is to give the creditor a chance to reflect on their previous refusal
to accept the payment, and to consider that the expenses of consignation shall be
charged against him, and that they bear the risk in the case of loss of the thing
consigned.
● Consignation, to amount to valid payment, must also comply with the provisions which
regulate payment
○ One of the rules is that payment should be made in legal tender
○ The general rule is that an offer of a bank check for the amount due is not a good
tender, except when there is no objection made on that ground
● 3 situations are contemplated here:
1. The creditor may accept the thing or amount deposited. In such a case, the
question of payment is settled altogether.
2. The creditor may refuse to accept the thing or amount deposited. In such as
case, the debtor shall then bring an action against him in order to compel him to
accept said thing or amount. In order that such action shall prosper, all of the
requisites of a valid and effective consignation must be proved.
3. The creditor may neither accept nor impugn the consignation because he is not
interested, or he is not known, or he is absent.
Art. 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)
● It is necessary to deposit the thing or sum due with the proper judicial authority in order
to effect payment
● After consignation has been made, the interested parties must be notified
○ The purpose of this second notice is to enable the creditor to withdraw the thing
or sum deposited in case they accept the consignation
● Requisites of Consignation
1. Presence of existing valid debt which is due
2. Presence of prior valid tender of payment
3. Refusal of creditor to accept amount or thing tendered
4. Presence of prior notice of consignation
5. Actual deposit of the amount or thing in court or competent authority
6. Second notice after the making of the deposit is mandatory
● The following cases in which consignation is deemed properly made
○ When the creditor accepts the thing or sum deposited, without objection, as
payment of the obligation
○ When the creditor questions the validity of the consignation, and the court, after
hearing, declares it has been properly made
○ When the creditor neither accepts nor questions the validity of the consignation,
and the court, after hearing, orders the cancellation of the obligation

Criteria Tender of Payment Consignation

Nature It is the antecedent of It is the principal or

consignation or preliminary consummating act for the
act to consignation extinguishment of the
obligation.

Effect It does not by itself extinguish It extinguishes the obligation

the obligation. when declared valid.

Character It is extrajudicial. It is judicial for it requires the

filing of complaint in court.
Art. 1259
The expenses of consignation, when properly made, shall be charged against the creditor.
(1178)
● It is just that the creditor bears the expenses of consignation, due to their unjust refusal
to accept payment
○ Expenses of consignation like storage fees, filling fees, attorney’s fees and other
related expenses.
● If improperly done, the debtor bears the expenses of consignation

Art. 1260
Once the consignation has been duly made, the debtor may ask the judge to order the
cancellation of the obligation.

Before the creditor has accepted the 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)
● Observance of all the requisites of a consignation operates as valid payment - the debtor
can now ask for the cancellation of the obligation by the court
● The debtor may withdraw as a matter of right the thing or sum deposited:
1. Before the creditor has accepted the consignation
2. Before a judicial declaration that the consignation was properly made
● In the cases above, the obligation will continue to exist and all expenses are paid by the
debtor
● Time of effect – the payment is deemed to have been made at the time of the deposit in
court
● The effects:
1. The debtor is released in the obligation
2. The accrual of interest is suspended
3. Deterioration or loss is borne by the creditor
4. Any increment or increase benefits the creditor
● Reciprocal obligation – when the debtor is bound by reciprocal obligation, he can ask the
court that the thing be delivered to the creditor only upon compliance by the latter with
the counter prestation.
● Withdrawal depends upon whether or not the consignation has been accepted or
judicially declared proper.
● 4 contemplated situations:
1. Can the debtor withdraw the amount deposited in consignation?
Yes, if it is not yet accepted by the creditor, or if the creditor accepts the
consignation but consents to the debtor to withdraw the same, however the
obligation is revived.
2. Can co-debtors object in the withdrawal on the amount deposited in
consignation?
 No. the debtor is still the owner of the amount consigned and therefore the debtor
is merely exercising his right to the amount deposited.
3. Can the creditor object in the withdrawal of the debtor? What if the amount
consigned is inadequate?
Yes, by acceptance of the amount consigned. If the amount consigned is
inadequate, the creditor can still accept the amount but with reservations.
Further, if the amount consigned is accepted without reservation, it may be
regarded as a waiver of further claims.
4. What will happen if an amount is consigned and the case is dismissed?
The consignation will become ineffectual.

Art. 1261
If, the consignation having been made, the creditor should authorize the debtor to withdraw the
same, he shall lose every preference which he may have over the thing. The co-debtors,
guarantors and sureties shall be released. (1181a)
● Consignation is for the benefit of the creditor
● The creditor may authorize the debtor to withdraw the deposit aster he has accepted it or
the court has issued a cancellation of the obligation
○ The relationship between creditor and debtor will remain the same as before the
contract or cancellation of the obligation

Special Forms of Payments - As to Tender of Payment and Consignation (Articles -

1256-1261)
● Consignation is the act of depositing the thing due w/ the court or judicial authorities
whenever the creditor cannot accept or refuses to accept payment and it generally
requires a prior tender of payment.
● It is defined in the case of Soco vs. Militante as a deposit of the object of the prestation
in a competent court in accordance with the rules prescribed by law, after tender of
payment was refused or circumstances which render payment impossible or inadvisable.
● Tender of payment is a manifestation made by the debtor of his willingness, readiness
and ability to pay.
● It is a special mode of payment because payment is made not to the creditor but to the
court.
● Consignation is an option on the part of the debtor because consignation assumes that
the creditor was in mora accipiendi when the creditor without just cause, refuses to
accept payment. Of course, if the creditor without just cause refuses to accept payment,
the debtor may just delay payment. But something still hangs above his head. He is
therefore, given the option to consign.
● Requisites:
1. That there was a debt due
2. That the consignation of the obligation had been made because of some legal
cause, either because:
i. Tender of payment was unjustly refused by the creditor or
ii. There is no need for tender of payment due to circumstances which make
tender of payment impossible or inadvisable
○ Circumstances Which Make Tender of Payment Unnecessary
(Article 1256)
a. The creditor was absent or unknown, or does not appear at
the place of payment
b. The creditor was incapacitated to receive the payment at
the time it was due
■ Payment made to an incapacitated person does not
count except to the extent that the incapacitated
person is benefited.
c. The creditor, without just cause refuses to give a receipt
d. Several persons claimed to be entitled to receive the
amount due
■ The debtor should file interpleader with
consignation
e. The title of the obligation has been lost
iii. That previous notice of the consignation had been given to the person
interested in the performance of the obligation (Article 1257)
iv. That the amount due was placed at the disposal of the court (consignation
proper)
v. That after the consignation had been made the person interested was
notified thereof (second notice.)
○ Failure of any of these requirements is enough ground to render a
consignation ineffective.