a. Payment or Performance

Rights of third persons who pay:

• Payment without the knowledge or against the will of the debtor:
• An ordinary third person can recover only insofar as the payment has been beneficial to the debtor (Art. 1236)
• An ordinary third person cannot compel the creditor to subrogate him in his rights (Art. 1237)
• A guarantor who pays is subrogated to all the rights which the creditor had against the debtor (Art. 2067)

When a third person, without the knowledge of the debtor, pays the debt, the rights of the former

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. (Art. 1236, NCC)

Whoever pays on behalf of the debtor without the knowledge or against the will of the latter, cannot compel the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty, or penalty. (Art. 1237, NCC)

When in a small community a majority of the inhabitants of age decide upon a measure for protection against lawlessness, fire, flood, storm or other calamity, anyone who objects to the plan and refuses to contribute to the expenses but is benefited by the project as executed shall be liable to pay his share of said expenses (Art. 2174, NCC)

For example, the people of a certain barrio decide to engage a security force to protect their community because of rampant lawlessness. For this reason, the people agree to contribute to the expenses of this security force. G however refuse to make any contribution. In the event that the security force apprehends robbers intending to rob the house of G, G should pay his share in the expenses for the community's engagement of the security force to protect the people from criminals. (Sta. Maria, 2017)

If amount admitted by a party

Even if there are no receipts and yet the amount claimed is admitted by a party, it should be granted. (People v. Abolidor, G.R. No. 147231, February 18, 2004)

Right to require payment for a fee for a request of disclosure of information from the grantor

The secured creditor may require payment of a fee for each request made by the grantor, but the grantor is entitled to a reply without charge once every six (6) months. [R.A. 11057, Section 37(b)]

However, secured creditor shall not charge any fee for compliance with a demand received under Section 39. (R.A. 11057, Section 43)

NOTE:

• A reminder is not equivalent to a demand.
• Premature demand does not give rise to default.
• If there is no fixed due date, or when the debtor promises to pay when his means permit him to do so, there can be no default unless a deadline is fixed by the parties or the court.

Kinds of delay

• Mora solvendi – delay or default committed by obligor
• Mora accipiendi – delay or default committed by obligee
• Compensatio Morae – default of both obligor and obligee

Principle of identity

Prestation or object. To extinguish the obligation, the debtor must deliver the thing or perform the act or forbearance due. The creditor cannot be compelled to accept a different thing, even one of equal or greater value, or a substitute act or forbearance against the creditor’s will. (Civil Code, art. 1244)

Parties to payment. Payment must be made by a proper payor to a proper payee.

• Payor. The debtor or a person interested in fulfilling the obligation may pay. A creditor is not bound to accept payment or performance from a third person with no such interest, unless otherwise stipulated. If the creditor accepts it, the obligation to the creditor is extinguished. An interested third person may pay without the debtor’s consent. (Civil Code, art. 1236)
• Payee. Payment must be made to the creditor, the creditor’s successor in interest, or a person authorized to receive it. This includes a transferee of an assignable credit. (Civil Code, art. 1240)

A third person who pays for the debtor may demand what was paid. If payment was made without the debtor’s knowledge or against the debtor’s will, recovery is limited to the benefit received by the debtor. With the debtor’s consent, the paying third person has the rights arising from subrogation, including rights against securities and collateral guarantees, unless the payment was intended as a donation. (Civil Code, arts. 1236–1238)

Payment to another person. Payment to a third person is valid insofar as it benefits the creditor. That benefit need not be proved if the third person later acquires the creditor’s rights, the creditor ratifies the payment, or the creditor’s conduct led the debtor to believe that the third person was authorized to receive it. (Civil Code, art. 1241)

Payment made in good faith to a person in possession of the credit releases the debtor. The requirement is possession of the credit, not merely evidence of the indebtedness. (Civil Code, art. 1242)

Payment to a person incapacitated to administer their property is valid if that person kept the thing delivered, or to the extent the payment benefited that person. (Civil Code, art. 1241)

Where payment should be made

• In the place designated in the obligation
• If there is no express stipulation and the undertaking is to deliver a specific thing – at the place where the thing might be at the moment the obligation was constituted
• In other cases – in the place of the domicile of the debtor (CIVIL CODE, art. 1251).

When to pay: This depends on whether the obligation has a period or condition. Once performance is due, demand is generally required to put the obligor in delay, subject to the exceptions in Civil Code, art. 1169. (See previous discussions when demand is not necessary)

Principle of integrity (CIVIL CODE, art. 1233)

General rule: A debt shall not be deemed paid UNLESS the thing or service of which the obligation consists of has been completely delivered or rendered, as the case maybe. (CIVIL CODE, art. 1233)

Acceptance by the obligee as full

• 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. This is because the obligee is deemed to have waived his right to collect the deficiency. (CIVIL CODE, art. 1235)
• Unlike Art. 1234 where the obligee does not give up his right to collect the balance, in Art. 1235, the obligee waives his right to collect such balance.

SPECIAL RULES/FORMS OF PAYMENT

• Application of payments
• Dation in payment (Dacion en pago)
• Cession or Assignment (in favor of creditors)
• Tender of payment and Consignation

Application of payments

The designation of the debt which payment shall be made, out of 2 or more debts owing the same creditor. (CIVIL CODE, art. 1252)

Requisites (OTD)

• There must be only One debtor and only one creditor;
• Two or more debts of the same kind; and
• The debt to which payment is applied must be Due. (CIVIL CODE, art. 1252)

Exception on 3rd requisite: There may be application of payment to a debt that is not yet due if:

• Parties so stipulate
• When application of payment is made by the party for whose benefit the term has been constituted (CIVIL CODE, art. 1252)

How application is made:

• Debtor makes the designation
• If not, creditor proposes to make the application by advising the debtor or through certain acts such as issuing a receipt with an application of payment. Since this is a mere proposal (since only a debtor can make an application of payments), the debtor must accept it either expressly or impliedly by not objecting to the creditor’s proposal, as when the debtor accepts without objection the receipt issued by the creditor with an application of payment.
• If the debtor makes no application and the creditor has not made a proposal, or if the application is not valid, then application is made by operation of law:
• It is to be applied to the most onerous debt (e.g., to an interest bearing debt over debts without interest; to a debt secured by a mortgage over a debt that is unsecured); or
• If all debts are equally onerous or of the same burden, or it cannot be determined which debt is the most onerous, then the payment should be applied pro rata to all the obligations due. (CIVIL CODE, art. 1252- 1254)

Q: Article 1176 provides that: “The receipt of the principal by the creditor, without reservation with respect to the interest, shall give rise to the presumption that said interest has been paid.” Article 1253 states that: “If the debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been covered.” How are these two rebuttable presumptions reconciled?

A: Article 1176 should be treated as a general presumption subject to the more specific presumption under Article 1253. Article 1176 applies when there is doubt as to whether interest is waived because the creditor accepts the payment for the principal without reservation with respect to the interest. Here, the creditor is presumed to have waived the right to collect interest. Article 1253 has no issue on waiver of interest because it is a given under this Article that the debt produces interest. The doubt is on whether the amount received by the creditor is payment for the principal or the interest. Article 1253 resolves this doubt by providing a hierarchy: payments shall first be applied to the interest; payment shall then be applied to the principal only after the interest has been fully paid. (Marquez v. Elisan Credit Corporation, G.R. No. 194642)

Dation in payment (Dacion en pago) (CIVIL CODE, art. 1245)

Definition – a mode of extinguishing an obligation whereby the debtor pays a monetary obligation with property. It is a special form of payment because one element of payment is missing: Identity.

Dation in payment extinguishes the obligation to the extent of the value of the thing delivered, either as agreed upon by the parties or as may be proved, unless the parties by agreement – express or implied, or by their silence – consider the thing as equivalent to the obligation, in which case the obligation is totally extinguished. (Shuy v. Spouses Cariño-Maulawin, G.R. No. 190375)

The contractual intention determines whether the property subject of the dation will be considered as the full equivalent of the debt and will therefore serve as full satisfaction for the debt. (Luzon Dev Bank v. Enriquez, G.R. No. 168646)

Intent is Controlling

Like in all contracts, the intention of the parties to the dation in payment is paramount and controlling. The contractual intention determines whether the property subject of the dation will be considered as the full equivalent of the debt and will therefore serve as full satisfaction for the debt. “The dation in payment extinguishes the obligation to the extent of the value of the thing delivered, either as agreed upon by the parties or as may be proved, unless the parties by agreement, express or implied, or by their silence, consider the thing as equivalent to the obligation, in which case the obligation is totally extinguished.” (Luzon Development Bank v. Enriquez, G.R. No. 168646)

Cession or Assignment (in favor of creditors) (CIVIL CODE, art. 1255)

The process by which a debtor transfers his property that is not exempt from execution in favor of creditors, so that the latter may sell them and apply the proceeds to his outstanding obligations. Except if there is contrary agreement, or as may be provided by law, the obligations are extinguished only up to the net amount of the proceeds of the sale.

Dation in Payment v. Cession in Payment

Tender of payment and Consignation (CIVIL CODE, art. 1256)

Tender

The act of offering to the creditor what is due him together with a demand that the creditor accepts the same.

If the creditor refuses w/o just cause to accept payment, he becomes in mora accipiendi and tender alone will not extinguish the obligation; consignation is needed. (Co v. PNB, G.R. No. L-51767)

Effects of Consignation

• Debtor may ask judge to order cancellation of obligation
• Running of interest is suspended
• Before creditor accepts or before judge declares consignation has been properly made, obligation remains (debtor bears risk of loss at the meantime, and after acceptance by creditor or after judge declares that consignation has been properly made – risk of loss is shifted to creditor)

When Consignation Extinguishes Obligation

Consignation is completed at the time the creditor accepts the same without objections, OR, if he objects, at the time the court declares that it has been validly made in accordance with law. (Dalton v. FGR Realty and Development Corporation, G.R. No. 172577)

Tender of payment vs. Consignation

IMPOSSIBILITY OF PERFORMANCE

• Physical impossibility – it is not within man’s capability
• Legal impossibility – when the prestation is prohibited by law
• Moral impossibility – when the service has become so burdensome that it could not have been the intention of the parties (CIVIL CODE, art. 1267)

Effect of Subsequent Impossibility of Performance in Obligation to Do

Debtor is released when the prestation becomes legally or physically impossible without fault on the part of the debtor. (CIVIL CODE, art. 1266)

NOTE: The obligation must be possible and legal when agreed upon by the parties. The impossibility must occur after the constitution of the obligation. Otherwise, the obligation is void from the beginning and there is nothing to be extinguished.