OBLIGATIONS AND CONTRACTS LAW

INTRODUCTION TO LAW

General sense. ​Law is any rule of action or any system of uniformity.

General divisions of law: (​ 1) Law promulgated and enforced by the state; and, (2) Law which is not
promulgated by the state.
Subjects of Law: ​(1) Divine Law – law of religion and faith which concerns itself with the concept of sin
and salvation; (2) Natural Law – divine inspiration in man of the sense of justice, fairness and
righteousness, not divine revelation or formal promulgation, but by internal dictates of reason alone; (3)
Moral Law – the totality of norms of good and right conduct growing out of the collective sense of right
and wrong of every community; (4) Physical Law – uniformities of actions and orders of sequence which
are the physical phenomena that we sense and feel; and, (5) State Law – promulgated and enforced by
the state

(State) Law - It is a rule of conduct, just, obligatory, promulgated by legitimate authority, and of common
observance and benefit.
Characteristics of (State) Law: (1) It is a rule of conduct; (2) It is obligatory; (3) It is promulgated by
legitimate authority; and, (4) It is of common observance and benefit.
Sources of Law: ​(1) Constitution; (2) Legislation; (3) Administrative or executive orders, regulations, and
rulings; (4) Judicial decisions or jurisprudence; (5) Custom; and, (6) Other sources.

Rule in case pf doubt in interpretation or application of laws ​– no judge or court shall decline to render
judgment by reason of the silence, obscurity or insufficiency of the laws (Art. 9, NCC). It is presumed that
the lawmaking body intended right and justice to prevail (Art. 10, NCC).

Classifications of law: ​(1) As to purpose: (a) Substantive law or that which creates and defines rights and
duties which may be either public of private in character and (b) Adjective law or that which prescribes the
manner or procedure by which rights may be enforced or their violations redressed; and, (2) as to subject
matter: (a) Public law or that which regulates the rights and duties arising from the relationship of the state
to the people and (b) Private law or that which regulates the relations of individuals with one another for
purely private ends.

OBLIGATIONS
General Provisions

Art. 1156. An obligation is a juridical necessity to give, to do or not to do.

Obligation i​ s a tie or bond recognized by law by virtue of which one is bound in favor of another to render
something.
Juridical Necessity ​simply means that in case of non-compliance of an obligation, the courts of justice
may be called upon by the aggrieved party to enforce its obligation or, in default thereof, the economic
value that it represents. ​Civil Obligations ​are those which give to the creditor or oblige a rights under the
law to enforce their performance in courts of justice. ​Natural Obligations a​ re those which are not being
based on positive law but on equity and natural law, do not grant a right of action to enforce their
performance although in case of voluntary fulfillment by the debtor, the latter may not recover what has
been delivered or rendered by reason thereof.

Essential requisites of an obligation: (1) Passive subject ​called the debtor or obligor, or the person who is
bound to the fulfillment of the obligation; he who has a duty;​ (2) An active subject c​ alled creditor or
obligee, or the person who is entitled to demand the fulfillment of the obligation; or he who has the rights;
(3) Object or prestation ​or subject matter of the obligation, is the conduct required to be observed by the
debtor; and,​ (4) A juridical or legal tie c​ alled the efficient cause, which binds or connects the parties to the
obligation.

Sources of obligations:
(1) Law​ – imposed by law law; must be clearly and expressly stated; not presumed. Eg. Support and
payment of taxes.
(2) Contracts ​– arise from the stipulation of the parties; meeting of minds between two persons whereby
one binds himself, with respect to the other, to give something or to render some service.
(3) Quasi-contracts​ – arise from lawful, voluntary and unilateral acts which are enforceable to the end that
no one shall be unjustly enriched. ​Kinds: (a) Negotiorum gestio​ or the voluntary management of the
property or affairs of another without the knowledge or consent of the latter; ​(b) solution indebiti​ or the
juridical relation which is created when something is received when there is no right to demand it and it
was unduly delivered through mistake.
(4) Crimes​ or acts or omissions punished by law – when they arise from civil liability which is the
consequence of a criminal offense. ​Scope of liability: (​ a) restitution; (b) reparation for the damage caused;
and (c) indemnification for consequential damages.
(​5) Quasi-delicts or torts​ – when they arise from damage caused to another through an act or omission,
there being fault or negligence, but no contractual relation exists between the parties. ​Requisites: (​ a)
There must be an act or omission; (b) There must be fault or negligence; (c) There must be damage
caused; (d) There must be a direct relation or connection or cause and effect between the act or omission
and the damage; and, (e) There is no pre-existing contractual relation between the parties.

Nature and Effects of Obligations

Specific thing or determinate thing ​is identified by its individuality as it can be particularly designated or
physically segregated from others of the same class. ​Generic thing or indeterminate thing ​refers only to a
class or genus to which it pertains and cannot be pointed out with particularity.

Duties of debtor in obligation to give a determinate thing:

(1) Preserve the thing (Art. 1163) – the obligor has the incidental duty to take care of the thing due
with the diligence of a good father of a family pending delivery. ​Standard of care: ​If the law or stipulation
does not provide for a standard of care, ​diligence of a good father of a family ​or ​ordinary care s​ hall be the
diligence required. Eg. A common carrier is under obligation to carry passengers safely as far as human
care and foresight can provide, using utmost diligence of a very cautious person
(2) Deliver the fruits of the thing (Art 1164) – The creditor has the right to the fruits of the thing from
the moment the obligation to deliver it arises. However, he shall acquire no real right over it until the same
has been delivered to him. ​Different kinds of fruits: (​ 1) Natural fruits; (2) Industrial fruits; and. (3) Civil
fruits. ​Rights: ​(1) Personal right which is the right or power of the creditor (active subject) to demand from
the debtor (passive subject) the fulfillment of the latter’s obligation; and, (2) Real right which is the right or
interest of a person over the specific thing without a definite passive subject against whom the right may
be personally enforced but is directed against the whole world.
(3) Deliver the accessions and accessories (Art. 1166). ​Accessions ​are fruits of a thing or additions
to or improvements upon a thing (the principal). ​Accessories a ​ re things joined to or included with the
principal thing for the latter’s embellishment, better use, or completion.
(4) Deliver the thing itself. (A) Obligation to give ​(1) I​ n a Specific real obligation o ​ r obligation to
deliver a determinate thing, where the debtor fails to comply with his obligation, the creditor may exercise
the following: (a) demand specific performance or fulfillment of the obligation with a right to indemnity for
damages; or (b) demand rescission or cancellation of the obligation also with a right to recover damages;
or (c) demand payment of damages only, where it is the only feasible remedy. ​(2) A ​ ​Generic real
obligation ​or obligation to deliver a generic things can be performed by a third person since the object is
expressed only according to its family or genus. (B) Obligation to do ​(1) The debtor fails to perform an
obligation to do, t​ he creditor has the right: (a) to have the obligation performed by himself or by another,
unless personal considerations are involved, at the expense of the debtor; and, (b) recover damages. (2)
The debtor does the obligation in contravention of the terms of the same or is poorly done, ​it may be
ordered undone. (3) ​The obligation consists in not doing, a ​ nd the obligor does what has been forbidden, it
shall be undone at his expense.
(5) Answer for damages in case of non-fulfillment or breach (Art. 1170).
Grounds for liability under Art. 1170:
(1) Fraud – the deliberate or intentional evasion of the normal fulfillment of the obligation, and
implies some kind of malice or dishonesty and it cannot cover cases of mistake and errors of
judgment made in good faith. ​Kinds of fraud: (​ a) ​Incidental fraud or dolo incidente (referred to
in Art. 1170) committed in the performance of an obligation already existing because of
contract; (b) ​causal fraud or dolo causante which is fraud employed in the execution of a
contract and which vitiates consent.*Waiver of action for future fraud is void.
(2) Negligence – any voluntary act or omission, there being no malice, which prevents the normal
fulfillment of an obligation. ​Factors to be considered: ​(a) Nature of the obligation; (b)
Circumstances of the person; (c) Circumstances of time; (d) Circumstances of place. ​Kinds of
diligence required: ​(a) that agreed upon by the parties; (b) that required by law if there is no
stipulation; (c) diligence of a good father of a family if there is no stipulation and no law.
 (3) Delay. ​Kinds of delay: (​ a) Ordinary delay is merely the failure to perform an obligation on
time. Debtor is not liable to pay damages. (b) Legal delay or default or mora is the failure to
perform an obligation on time which failure constitutes a breach of the obligation. Demand
must be made first to make the debtor liable for damages. ​Kinds of Legal Delay or Default:
Mora solvendi or the delay on the part of the debtor to fulfill his obligation; Mora accipiendi or
the delay on the part of the creditor to accept the performance of the obligations; and,
Compensatio morae or the delay of the obligors in reciprocal obligation. The delay of the
obligor cancels the delay of the oblige, and vice versa. ​When demand is not necessary to put
debtor in delay. ​(a.) When the obligation so provides; (b.) When the law so provides; (c.)
When time is of the essence. (d.) When demand would be useless; and, (e.) When there is
performance by a party in reciprocal obligations.
(4) Contravention of tenor – violation of the terms of the obligations
Exception to liability: Fortuitous event w​ hich is any event that cannot be foreseen or which, though
foreseen is inevitable. ​Acts of man or fortuitous event in the strict sense ​is an event independent
of the will of the obligor but not of other human wills; eg. War, fire, robbery, murder, insurrection.
Acts of God or force majeure w ​ hich are events totally independent of the will of every human
being; eg. Earthquake, flood, rain, shipwreck, lightning, eruption or volcano, etc. ​Requisites of a
fortuitous event: (​ a) The event must be independent of the human will or at least of the debtor’s
will; (b) The event could not be foreseen, or if foreseen, is inevitable; (c) The event must be of
such a character as to render it impossible for the debtor to comply with his obligation in a
normal manner; and, (d) The debtor must be free from any aggravation of the injury to the
creditor, or, in other words, there is no concurrent negligence on his part.
Exception to the exception: When debtor is still liable despite presence of Fortuitous event: (​ 1) When
expressly specified by law: (1.a.) the debtor is guilty of fraud, negligence, delay or contravention
of the obligation; (1.b.) the debtor has promised to deliver the same thing to two persons who do
not have the same interest; (1.c) The obligation to deliver a specific thing arises from a crime;
(1.d.) The thing to be delivered is generic; (2) When declared by stipulations; (3) When the
nature of the obligation requires assumption of risk.
Remedies available to creditors for the satisfaction of their claims: (1) exact fulfillment (specific
performance) with right to damages; (2) pursue the leviable property of the debtor; (3) after
having pursued the property in possession of the debtor, exercise all the rights (eg right to
redeem) and bring all the actions of the debtor (except those inherent in or personal to the
person of the latter; (4) ask the court to rescind or impugn acts or contracts which the debtor
may have done to defraud him when he cannot in any manner recover his claim.

Duties of debtor in obligation to give a determinate thing:

(1) To deliver the thing which is of the quality intended by the parties taking into consideration the
purpose of the obligation and other circumstances;
(2) To be liable for damages in case of fraud, negligence or delay in the performance of his obligation
or contravention of the tenor thereof.

Others:
(1) Usury – contracting for or receiving interest in excess of the amount allowed by law for the loan or
use of money, goods, chattels or credits. ​Requisites for recovery of interest: ​(a) The payment of interest
must be expressly stipulated; (b) The agreement must be in writing; (c) The interest must be lawful.
(2) Presumption – the inference of a fact not actually known arising from its usual connection with
another which is known or proved. Art. 1176 provides that the receipt of the principal by the creditor
without reservation with respect to interest shall give rise to the presumption that said interest has been
paid. Further, the receipt of a later installment of a debt without reservation as to prior installments shall
likewise raise the presumption that such installments have been paid.
(3) Transmissibility of rights – All rights acquired in virtue of an obligation are generally transmissible,
except: (a) Prohibited by law like in partnership, agency, and commodatum which are purely personal in
character; (b) prohibited by stipulation of the parties.

Different Kind of Obligations

Pure and Conditional Obligations.

Definitions: Pure Obligation ​is one which is not subject to any condition and no specific date is mentioned for
its fulfillment and is, therefore, immediately demandable. ​Conditional obligation i​ s one whose
consequences are subject in one way or another to the fulfillment of a condition. ​Condition is a future
and uncertain event upon which the happening of which, the effectivity or extinguishment of an
 obligation subject to it depends. ​Period ​is a future and certain event upon the arrival of which the
obligation subject to it either arises or is extinguished. ​Potestative condition ​or when the condition
depends upon the will of one of the contracting parties.
Kinds of condition: ​(1) Suspensive condition or one the fulfillment of which will give rise to an obligation; (2)
Resolutory condition or one the fulfillment of which will be extinguish an obligation
Defects in conditional obligations:
1. Potestative condition depends solely upon the will of the debtor, the conditional obligation shall be
void because its validity and compliance is left to the will of the debtor and it cannot, therefore, be
demanded. *If the condition depends upon the will of the creditor, the obligation is valid. If the
condition is resolutory in nature, the obligation is valid although its fulfillment depends upon the
sole will of the debtor. Eg pacto de retro which is a sale with the right to repurchase or redeem
the property.
2. Impossible conditions which are those contrary to good customs, or public policy, and those
prohibited by law shall render the obligation void. The condition not to do an impossible thing
shall be considered as not having been agreed upon. If the obligation is divisible, the part thereon
not affected by the impossible condition shall be valid. Physically impossible conditions are those
which cannot exist by reason of the nature of things. Legally impossible conditions are those
which are contrary to law, morals, good customs, public order or public policy.

Positive condition o​ r condition capable of fulfillment is deemed extinguished (1) as soon as the time
expires without the event taking place; or, (2) as soon as it has become indubitable that the event will
not take place although the time specified has not expired (Art. 1184).
Negative condition o ​ r a condition consisting of an omission of an act shall become effective and binding
(1) from the moment the time indicated has elapsed without the event taking place; or, (2) from the
moment it has become evident that the event cannot occur, although the time indicated has not yet
elapsed (Art. 1185).
Constructive fulfillment of suspensive condition: Requisites: (​ 1) the condition is suspensive; (2) The
obligor actually prevents the fulfillment of the condition; and, (3) He acts voluntarily.
Retroactive effects of fulfilment of suspensive obligation: (1) Obligations to give – becomes demandable
only upon the fulfillment of the condition but the effects shall retroact to the day when the obligation
was constituted.
Rules regarding improvement, loss, or deterioration during pendency of the suspensive condition (applies
also to suspensive period; applies in reverse to resolutory condition and period): ​(1) loss without fault
of the debtor extinguishes the obligation; (2) loss through the fault of the debtor entitles the creditor to
demand payment; (3) deterioration without the fault of the debtor is borne by the creditor; (4)
deterioration through the fault of the debtor entitles the creditor to choose between the rescission of
the obligation or fulfillment thereof, with indemnity for damages in either case; (5) improvement of the
thing by its nature shall inure to the benefit of the creditor; (6) improvement at the expense of the
debtor entitles debtor the to rights granted to the usufructuary.
Power to rescind reciprocal obligations ​– implied; in case one of the obligors should not comply with what
is incumbent upon him. The injured party may choose between the fulfillment and the rescission of
the obligation, with the payment of damages in either case. Should creditor choose fulfillment but the
same becomes impossible, creditor is still entitled to rescission.

Obligations with a Period

Instances deemed a period: ​(1) The debtor promises to pay when his means permit him to do so; (2) When
the debtor binds himself to pay: little by little, as soon as possible, from time to time, at any time I
have the money, in partial payments, when I am in position to pay.
Debtor loses the right to make use of a period: (1) when after the obligations has been contracted, he
becomes insolvent, unless he gives a guaranty or security for the debt; (2) when he does not furnish
to the creditor the guaranties or securities which he has promised; (3) when by his own acts he has
impaired said guaranties or securities after their establishment, and when through a fortuitous event
they disappear unless he immediately gives new ones equally satisfactory; (4) when the debtor
violates any undertaking in consideration of which the creditor agreed to the period; (5) when the
debtor attempts to abscond (Art. 1198)

Alternative and facultative obligations

Definitions: Alternative obligation ​is one wherein various prestations are due but the performance of one of
them is sufficient as determined by the choice which, as a general rule, belongs to the debtor.
Facultative obligation is one where only one prestation has been agreed upon but the obligor may
render another in substitution.
Alternative; The right to choose belongs to the debtor as a general rule, unless otherwise is expressly stated.
The choice shall produce no effect except from the time it has been communicated. Once the choice
is made and communicated to the creditor, the obligation ceases to be alternative and becomes
simple. The debtor shall lose the right of choice when only one is practicable among the prestations
he is alternatively bound. Debtor may rescind the obligation if he loses the right of choice through the
acts of the creditor. Creditor has the right to indemnity for damages when all the things are lost or
compliance has become impossible, and such indemnity shall be based on the value of the last thing
which disappeared.
Alternative; The right to choose was expressly conferred to the creditor. Rules in case of loss before the
creditor exercises his right of choice: ​(1) ONE is lost through fortuitous event, debtor shall perform by
delivering that which the creditor chooses form among the remainder, even if only one is left; (2) ONE
is lost through the fault of the debtor, the creditor may claim any of those subsisting, or the price of
that which, through the fault of the debtor, has disappeared, with right to damages; (3) ALL things are
lost through the fault of the debtor, choice by the creditor shall fall upon the price of any of one of
them, also with indemnity for damages.
Facultative; Effect of loss: (1) Before substitution – ​If the principal thing is lost through a fortuitous event, the
obligation is extinguished; otherwise the debtor is liable for damages. The loss of the thing intended
as a substitute with or without the fault of the debtor does not render him liable. ​(2) After substitution –
If the principal thing is lost, the debtor is not liable whatever may be the cause because it is no longer
due. If the substitute is lost, the liability of the debtor depends upon whether the loss is by this fault or
no.

Joint and Solidary obligations

Definitions: Joint Obligation ​or one where the whole obligation is to be paid or fulfilled proportionately by the
different debtors and/or is to be demanded proportionately by the different creditors. ​Solidary
Obligation ​or one where each one of the debtors is bound to render and/or each one of the creditors
has a right to demand from any of the debtors, entire compliance with the prestation.
Obligation is presumed to be JOINT unless ​(1) the obligations expressly states solidarity; (2) law requires
solidarity; (3) nation of the obligation requires solidarity. ​Words that indicate solidarity: ​jointly and/or
severally; solidaria; in solidum; together and/or separately; individually or collectively; “I promise to
pay” signed by two or more persons
Kinds of solidarity: (​ 1) passive solidarity – solidarity on the part of the debtors, where any one of them can be
made liable for the fulfillment of the entire obligation; (2) active solidarity – solidarity on the part of the
creditors where any of them can demand the fulfillment of the entire obligation; (3) mixed solidarity –
solidarity on the part of the debtors and creditors, where each of the debtors is liable to render, and
each one of the creditors has a right to demand, entire compliance with the obligation.
Specific rules on solidarity: (1) each solidary creditor may do whatever may be useful to the others but not
anything which may be prejudicial to the latter; (2) a solidarity creditor cannot assign his rights without
the consent of the others; (3) solidarity may exist although the creditors and debtors may not be
bound in the same periods or conditions; (4) the debtor may pay any one of the solidary creditor; but
if demand has been made by any of the solidary creditors, payment should be made to him; (5) The
creditor may proceed against any one of the solidary debtors or some or all of them simultaneously.
The demand made against them shall not be an obstacle to those which may subsequently be
directed against the others, so long as the debt has not been fully collected; (6) Payment made by
one of the solidary debtors extinguishes the obligation; If there are two or more solidary debtors offer
to pay, the creditor may choose which offer to accept; (7) The solidary debtor who made payment
may claim from his co-debtors only the share which corresponds to each. When one of the solidary
debtors cannot pay because of insolvency, the latter’s share shall be borne by all his co-debtors in
proportion to the debt of each. (8) Payment by a solidary debtor shall not entitle him to reimbursement
from his co-debtors if such payment is made after the obligation has prescribed or become illegal. (9)
Loss without fault of the solidary debtors shall extinguish the obligation; (10) Loss of thing through
fault of one of the solidary debtors shall make ALL debtors liable for the price and payment of
damages, without prejudice to the their action against the guilty or negligent debtor; (11) The things is
loss of performance is impossible because of fortuitous event after one of the solidary debtors has
incurred delay, ALL debtors shall be liable for the price and payment of damages, without prejudice to
the their action against the guilty or negligent debtor; (12) Each solidary debtor may raise personal
defenses available to him only as regards that part of the debt for which the latter is responsible.
Novation, Compensation, Confusion or Remission:​ (1) in Active Solidairty – Solidary creditor who
extinguished obligation by either of the four modes shall extinguish obligation as far as debtor is
concerned but shall be liable to the others for their corresponding shares considering that the acts are
prejudicial to them; (2)In Passive Solidarity – remission made by the creditor of the share which
 affects one of the solidary debtors does not release the latter from the responsibility towards the
co-debtors, in case the debt had been totally paid by anyone of them before the remission was
effected; (3) in Joint obligations – such act of one creditor shall only affect his own share only and
shall not prejudice the right of the other joint creditor; the remission of the whole obligation obtained
by one of the solidary debtors, does not entitle him to reimbursement from his co-debtors.

Divisible and Indivisible obligations

Definitions: Divisible obligation ​is one of the object of which, in its delivery or performance, is capable of
partial fulfillment. ​Indivisible obligation ​is one of the object of which, in its delivery or performance, is
not capable of partial fulfillment.
​ bligations to give a definite thing and not susceptible to partial performance
Indivisible – o
Divisible – object of the obligation is the execution of a certain number of days of work, the accomplishment of
work by metrical units or analogous things which by their nature are susceptible of partial
performance; so provided by law or intended by the parties even though the object or service may be
physically divisible
Joint Indivisible Obligation – (1) the obligation is joint because the parties are merely proportionately liable but
is also indivisible because the object or subject matter is not physically divisible into different parts.
The debt can be enforced only by proceeding against all the debtors. If one of the latter should
insolvent, the others shall not be liable for his share. (2) Joint indivisible obligation shall give rise to
indemnity for damages from the time anyone of the debtors does not comply with his undertaking.
The debtors who may have been ready to comply shall not contribute to the indemnity beyond the
corresponding share in the thing or service

Obligations with a penal clause

Definitions: Penal Clause – ​an accessory undertaking attached to an obligation to assume greater liability in
case of breach
Specific rules: (1) Debtor cannot exempt himself from liability from performance of the obligation by paying the
penalty (2) proof of actual damages suffered by the creditor is not necessary in order that the penalty
may be demanded (3) Nullity of the penal clause does not carry with it the principal obligation; the
nullity of the principal obligation carries with it the nullity of the penal clause.

Extinguishment of Obligations

Payment or performance
Payment – d ​ elivery of the money and/or performance of an obligation
From whom may creditor accept payment: (1) debtor; (2) any person who has interest in the obligation (eg
guarantor); (3) a third person who has no interest in the obligation when there is stipulation that he
can make payment.
Effect of payment by third person: (1) If made without the knowledge or against the will of the debtor – the
payer can recover from the debtor only insofar as the payment has been beneficial to the latter (only
the amount of debt demandable during the time of payment); (2) If made with the knowledge of the
debtor – the payer shall have the rights of reimbursement and subrogation or the right to recover what
he has paid, and to acquire all the rights of the creditor; (3) Payment made by a third person who has
no intention to be reimbursed by the debtor shall be deemed a donation and which requires the
consent of the debtor. Payment shall be valid as to the creditor who received it.
Person to whom payment should be made: (1) the creditor or obligee; (2) successor in interest; (3) any
person authorized to receive it
Effect of payment to person not authorized to receive it: (​ 1) Payment to incapacitated person – NOT VALID
unless such incapacitated person kept the thing paid and delivered the same to the creditor, or was
benefited by the payment; (2) Payment to third person – NOT VALID except insofar as it has
redounded to the benefit of the creditor; However, ​Benefit to creditor need not be proven when: ​(a)
there is subrogation of the payor in the creditor’s rights; (b) there is ratification by the creditor; or (c)
there is estoppel on the part of the creditor. (3) Payment made in good faith to a person in possession
of the credit shall be VALID and shall release the debtor.
Rules on Payment/Performance: (1) Generic Thing – the creditor cannot demand a thing of superior quality;
the debtor cannot deliver a thing of inferior quality; (2) creditor cannot be compelled to receive partial
payment/performance; neither may debtor be compelled to make partial payment/performance;
 except when the debt is in part liquidated and in part unliquidated, the creditor may demand and the
debtor may effect the payment of the liquidated portion without waiting for the liquidation of the rest.

Special form of payments:

1. Dation in payment – conveyance of ownership of a thing as an accepted equivalent of
performance
2. Application of payments – designation of the debt to which should be applied the payment made
by the debtor who has various debts of the same kind in favor of one and the same creditor.
Requisites: (​ 1) there must be one debtor and one creditor; (2) there must be two or more debts; (3) the
debts must be of the same kind; (4) the debts to which payment made by the debtor has been
applied must be due; and, (5) the payment made must not be sufficient to cover all the debts.
Rules on Application of Payments: (1) The debtor has the first choice, he must indicate the same at the
time of the payment; (2) if debtor does not apply payment, the creditor may make the designation
by specifying in the receipt which debt is being paid; (3) If the creditor has not also made the
application is not valid, the debt which is most onerous (burdensome) to the debtor shall be
deemed to have been satisfied; and, (4) If the debts due are the same nature and burden, the
payment shall be applied to all of them proportionately.
3. Payment by cession – assignment or abandonment of all the properties of the debtor for the
benefit of his creditors in order that the latter may sell the same and apply the proceeds thereof to
the satisfaction of their credits.
Requisites: (​ 1) There must be two or more creditors; (2) The debtor must be (partially) insolvent; and, (3)
the cession must be accepted by the creditors.
Effects of Cession: The assignment does not make the creditors the owners of the property of the debtor.
Further, debtor is only released from the debt up to the net proceeds of the sale of the property
assigned.
4. Tender of payment and consignation. ​Tender of Payment ​is the act, on the part of the debtor of
offering to the creditor the ting or amount due. ​Consignation is 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
Requisites of valid tender of payment: (​ 1) tender must comply with the rules of payment; (2) must be an
unconditional and for the whole amount; (3) must be actually made
Requisites of valid consignation: ​(1) existence of a valid debt which is due and demandable; (2) tender of
payment by the debtor and refusal without justifiable reason by the creditor to accept; (3) previous
notice of consignation to persons interested in the fulfillment of the obligations; (4) consignation of
the thing or sum due.
Rules on consignation: (1) once consignation has been made, interested parties shall be notified; (2)
expenses shall be charged against the creditor; (3) Once consignation has been made, the
debtor may ask the judge to order the cancellation of the obligation. Before the creditor has
accepted the consignation or before the 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; (4) once the consignation has been made, if the creditor give authority to the
debtor to withdraw the same, the creditor shall lose the preference which he may have over the
thing; likewise, the co-debtors, guarantors and sureties shall be released.

Loss of the thing (DETERMINATE) due

Thing is lost ​when it perishes, or goes out of commerce or disappears in such a way that its existence is
unknown or it cannot be recovered. Loss of a determinate thing is the equivalent of impossibility of
performance in obligations to do.
Loss of a generic thing does not extinguish the obligation
Rules on loss of a determinate thing: (​ 1) when lost in the possession of the debtor, it is presumed that the loss
was due to his fault, unless there is proof to the contrary; (2) if the prestation becomes physically or
legally impossible without the fault of the obligor, he shall be released from the obligation; (3) when
the service has become so difficult as to be manifestly beyond the contemplation of the parties, the
obligor may also be released therefrom, in whole or in part; (3) when the thing that is lost proceeds
from a criminal offense, the debtor shall not be exempt from liability regardless of the cause of the
loss; (4) the creditor shall have all the rights which the debtor may have against third persons by
reason of the loss.

Condonation or remission of the debt

Definitions: Condonation or remission – t​ he gratuitous abandonment by the creditor of his right against the
debtor
Requisites: (1) it must be gratuitous; (2) it must be accepted by the obligor; (3) the parties must have capacity;
(4) it must not be inofficious; and, (5) if made expressly, it must comply with the forms of donations.
Rules: (1) voluntary delivery of a private document evidencing a credit implies condonation or remission; (2) If
a claim is made that the condonation is inofficious (unlawfully deprives heirs of their would-be
inheritance), the debtor and his heirs may uphold it by proving that the delivery of the document was
made in virtue of payment of the debt; (3) condonation of the principal debt shall extinguish the
accessory obligations (guaranty, surety, pledge, etc); but the waiver of the latter shall not extinguish
the principal obligation.

Confusion or merger of rights of the creditor and debtor

Definitions: Confusion or merger – m ​ eeting in one person of the qualities of creditor and debtor with respect to
the same obligation.
Requisites:​ (1) It must take place between the principal debt and creditor; and, (2) it must be complete.

Compensation
Definitions: Compensation – e ​ xtinguishment to the concurrent amount of the debts of two persons who, in
their own right, are debtors and creditors of each other.
Requisites of legal compensation: (1) the parties are principal creditors and principal debtors of each other;
(2) both debts consist in sum of money, or of consumable things of the same kind and quality; (3) the
two debts are due and demandable; (4) the two debts are liquidated; (5) no retention or controversy
commenced by a third person
Compensation and assignment: (1) Debtor consented to the assignment of rights made by a creditor in favor
of a third person – debtor CANNOT set up against the assignee the compensation which would
pertain against him; (2) Debtor consented to the assignment of rights made by a creditor in favor of a
third person but assignor was notified by the debtor at the time he gave his consent – Debtor MAY set
up the compensation against the assignee; (3) Creditor communicated the assignment but Debtor did
not consent to it – Debtor MAY set up the compensation; (4) Assignment is made without the
knowledge of the debtor – Debtor MAY set up the compensation

Novation
Definitions: Novation – ​extinction of an obligation through the creation of a new one which substitutes it.
Requisites of Novation: (1) previous valid obligation; (2) capacity and intention of the parties to modify or
extinguish the obligation; (3) modification or extinguishment of the obligation; and, (4) creation of a
new valid obligation.
Forms of Personal Novation: (1) Substitution – when the person of the debtor is substituted; (1.a) Expromision
– takes place when a third person of his own initiative and without the knowledge or against the will of
the original debtor assumes the latter’s obligation with the consent of the creditor; (1.b) Delegacion –
takes place when the creditor accepts a third person to take place of the debtor at the instance of the
latter. (2) subrogation – substitution of one person in the place of a creditor with reference to a lawful
claim or right, giving the former all the rights of the latter, including the right to employ all remedies to
enforce payment; subrogation transfer to the person subrogated the credit with all the rights thereto
appertaining, either against the debtor or against third persons; (2.a.) Conventional subrogation takes
place by express agreement of the original parties; (2.b) Legal subrogation takes place without
agreement but by operation of law.
Rights of the new parties: (1) Expromision – the payment by the new debtor gives the old debtor the right to
beneficial reimbursement; (2) delegacion – payment made with the consent of the original debtor
shall entitle the new debtor to reimbursement and subrogation; if the new debtor is insolvent, old
debtor shall not be liable unless the insolvency of the new debtor is of public knowledge when the
latter was delegated.
If the new obligation is void, ​ the old obligation shall subsist unless there is contrary stipulation.
If the old obligation is void, t​ he new obligation shall likewise be void.
Legal subrogation is presumed when: ​(1) a creditor pays another creditor who is preferred; (2) a third person
not interested in the obligation pays with express approval of the debtor; (3) even without the
knowledge of the debtor, a person interested in the fulfillment of the obligation pays