Payment

Payment as Performance

Payment is the normal mode by which an obligation is extinguished because the debtor renders exactly what is due. In the Civil Code sense, payment is not confined to the delivery of money; it includes the performance of an obligation to give, to do, or, where applicable, to comply with a legally enforceable undertaking in any other manner.

Payment extinguishes the obligation only to the extent that the prestation due is fulfilled. A creditor receives satisfaction because the juridical relation has achieved its object, while the debtor is released because the debt has been performed according to its terms, the nature of the obligation, law, usage, and good faith.

The controlling ideas are identity, integrity, and indivisibility. The debtor must deliver or perform the very prestation due, must complete it, and generally may not divide it without the creditor's consent or a legal basis.

Requisites of Valid Payment

Valid payment requires a debt that is due and demandable, a payer who can validly perform, a payee who is entitled or authorized to receive, and a prestation that conforms to the obligation. If any of these elements is defective, the supposed payment may fail to extinguish the obligation, may extinguish it only partly, or may produce rights of reimbursement instead of full release.

Persons Who May Pay

The debtor is the primary person expected to pay. Payment by the debtor requires, in obligations to give, free disposal of the thing due and capacity to alienate it; a person cannot validly transfer ownership or release a debt through a disposition that the law does not allow that person to make.

A third person with an interest in the obligation, such as a guarantor, surety, co-debtor, mortgage debtor, or person whose property is affected by the debt, may pay to protect that interest. The creditor generally must accept payment from such person because the law recognizes the payer's legitimate stake in extinguishing the debt.

A third person without interest may also pay, but the creditor is not bound to accept such payment unless there is a stipulation or the creditor voluntarily receives it. The reason is that performance may affect the debtor's personal relations, securities, defenses, and reimbursement exposure.

If a third person pays with the debtor's knowledge and consent, the third person may recover from the debtor what was paid and may, when the circumstances warrant it, be subrogated to the creditor's rights. Subrogation matters because it transfers securities, preferences, and accessory rights to the payer instead of leaving the payer with a mere personal claim.

If a third person pays without the debtor's knowledge or against the debtor's will, recovery is limited to the extent that the payment benefited the debtor. This rule prevents an officious payer from imposing an unwanted full reimbursement obligation while still preventing unjust enrichment when the debtor's debt was actually reduced or extinguished.

A third person who pays against the debtor's will does not acquire the creditor's accessory rights such as guaranty, pledge, or mortgage. The debt may be extinguished as to the creditor, but the payer's recourse against the debtor is narrower because the law protects the debtor from an unauthorized transfer of burdens.

Payment by a third person who does not intend to be reimbursed is treated as liberality. As between payer and debtor, the rules on donations may become relevant; as between creditor and debtor, however, a validly accepted payment can still extinguish the obligation because the creditor has received satisfaction.

Persons Who May Receive Payment

Payment must be made to the creditor, the creditor's successor in interest, or any person authorized to receive it. Authority may come from law, a judicial order, agency, assignment, corporate office, guardianship, administration, or the creditor's own representation that a particular person may collect.

Payment to an incapacitated creditor is valid only to the extent the creditor kept the thing delivered or was benefited by it. The debtor carries the risk of paying a person who cannot give effective discharge unless the payment actually preserved value for that creditor.

Payment to a third person is valid to the extent it redounds to the creditor's benefit. The benefit is established when the payment actually reaches the creditor, discharges a debt owed by the creditor, preserves the creditor's property, or otherwise produces a legally recognizable advantage for the creditor.

The debtor need not separately prove benefit when the creditor ratifies the payment, when the third person later acquires the creditor's rights, or when the creditor's conduct led the debtor in good faith to believe that the third person had authority to receive. These situations rest on ratification, succession, and estoppel.

Payment made in good faith to a person in possession of the credit releases the debtor. Possession of the credit means apparent entitlement to collect, not mere physical custody of a paper disconnected from authority; the debtor's good faith must be grounded on circumstances that reasonably indicate that the payee can give discharge.

Payment to the creditor is ineffective if made after the debtor has been judicially ordered to retain the debt, as in garnishment or attachment. Once the debtor is bound by a lawful retention order, payment to the original creditor disregards the court's control over the credit and does not release the debtor from liability to the attaching claimant.

Identity of the Prestation

The debtor cannot compel the creditor to accept a prestation different from the one due, even if the substitute is more valuable or more convenient. The creditor bargained for a particular performance, and payment is satisfaction of that undertaking, not a unilateral exchange chosen by the debtor.

In obligations to deliver a determinate thing, the debtor must deliver that specific thing with its accessions and accessories, even if they were not separately mentioned. If the thing is lost, deteriorated, improved, or transferred before delivery, the rules on loss, impairment, accession, and damages determine whether the obligation is extinguished, converted into indemnity, or breached.

In obligations to deliver a generic thing, the debtor must deliver an item of the class or kind contemplated. If quality and circumstances have not been stated, the creditor cannot demand the best quality and the debtor cannot tender the worst; the law supplies a standard of fair, ordinary, or medium quality consistent with the obligation.

In obligations to do, the debtor must perform the service or act promised. A creditor cannot be forced to accept another act, another method, or another performer when the personal qualifications, skill, trust, or agreed manner of performance formed part of the obligation.

In obligations not to do, payment is compliance through abstention. The debtor performs by refraining from the prohibited act during the period and within the scope required; breach may result in undoing what was done, damages, or both, depending on the nature of the violation.

Integrity and Completeness

A debt is not deemed paid unless the thing or service in which the obligation consists has been completely delivered or rendered. The creditor may reject incomplete performance because partial satisfaction is not the performance promised.

The rule on integrity protects the creditor from being forced to finance, store, accept, litigate over, or otherwise deal with fragments of performance. It also protects the debtor from a later claim when complete performance has in fact been made and accepted without lawful reservation.

The Civil Code recognizes substantial performance in good faith. When the debtor has honestly and substantially performed, the debtor may recover as though there had been full performance, less damages suffered by the creditor because of the defects or omissions.

Substantial performance does not excuse bad faith, deliberate deviation, essential nonperformance, or defects that defeat the purpose of the obligation. The doctrine applies when the main undertaking has been achieved and the remaining defects can be compensated in money without rewriting the contract.

Acceptance of incomplete or irregular performance may also bar the creditor from later insisting on defects if the creditor knew of the incompleteness or irregularity and accepted without protest or reservation. This rule rests on waiver and fairness: a creditor who knowingly treats defective performance as sufficient cannot later revive objections that should have been raised upon acceptance.

Indivisibility of Payment

The creditor cannot be compelled to receive partial payment, and the debtor cannot be compelled to make partial payment. The obligation must be satisfied as a whole unless the parties agreed otherwise, the debt is by nature divisible, or the law authorizes partial performance.

When the obligation has several prestations that are separately demandable, or when part of the debt is liquidated and another part remains unliquidated, payment or demand may be made as to the liquidated or due portion. A debtor should not be held in default for failing to pay an amount that is still uncertain, while a creditor should not be deprived of a portion that is already fixed and demandable.

Installment obligations are divisible according to their terms. Each installment generally has its own due date, and nonpayment of one installment does not automatically make future installments due unless an acceleration clause, law, or the nature of the obligation produces that effect.

Monetary Payment

Payment of money obligations is made in the currency stipulated if the stipulation is valid and performance in that currency is legally possible. Philippine law allows parties, within legal limits, to agree on payment in foreign currency, and the obligation is ordinarily governed by that agreement.

If no valid currency stipulation controls, payment is made in Philippine legal tender. Legal tender consists of currency that the law requires a creditor to accept for payment of debts, subject to statutory and regulatory limits, especially as to coins.

A check, whether personal, manager's, or cashier's, is not legal tender in the strict sense. The creditor may refuse it unless the creditor has agreed to that mode of payment, usage or prior dealings justify it, or refusal would violate a specific obligation.

Delivery of checks, drafts, promissory notes, or other mercantile documents produces payment only when they have been encashed, credited as cash, or impaired through the creditor's fault. Until then, the underlying obligation generally remains, although the creditor who accepted the instrument must act with the diligence required to preserve it.

If the creditor accepts a check as absolute payment, the parties' agreement may treat the obligation as extinguished upon delivery of the check. Without such agreement, acceptance is usually conditional because the creditor has received an instrument, not yet the money due.

Extraordinary inflation or deflation may affect the value of monetary obligations only when the statutory requirements are present. The change must be extraordinary, official or clearly established, and not merely the ordinary fluctuation of purchasing power that parties are presumed to bear in long-term obligations.

Interest, Installments, and Receipts

When a debt produces interest, payment should first cover interest that is due before it is applied to principal, unless the creditor validly agrees otherwise. This preserves the creditor's compensation for the use or detention of money and prevents the debtor from unilaterally stopping the running of interest by labeling a payment as principal.

A receipt for principal without reservation as to interest gives rise to the presumption that interest has been paid. A receipt for a later installment without reservation gives rise to the presumption that earlier installments have been paid.

These presumptions are rebuttable. They yield to proof of mistake, contrary agreement, partial receipt, accounting practice, fraud, or circumstances showing that the creditor did not intend to waive unpaid interest or prior installments.

Receipts are strong evidence of payment but are not the only evidence. Payment may be shown by documents, admissions, bank records, conduct, possession of the instrument of indebtedness, or other competent proof consistent with the nature and amount of the obligation.

Place and Expenses of Payment

The place of payment is first determined by stipulation. If the parties fixed a place, payment must be offered and made there because the place forms part of the agreed manner of performance.

If there is no stipulation and the obligation is to deliver a determinate thing, payment is made at the place where the thing was located when the obligation was constituted. This rule prevents either party from changing the burden of delivery by later moving the object.

In other cases, payment is made at the debtor's domicile. If the debtor changes domicile in bad faith or after incurring the obligation in a manner that increases the creditor's expenses, the debtor bears the additional expense caused by the change.

Extrajudicial expenses required for payment are generally borne by the debtor unless there is a contrary stipulation. Judicial costs are governed by procedural rules and by the court's disposition.

Application of Payments

Application of payments determines which of several debts is extinguished when the debtor makes a payment insufficient to cover all debts owed to the same creditor. It applies only when there are two or more debts of the same kind, between the same parties in the same capacities, and the payment cannot satisfy all.

The debtor has the first right to designate the debt to which payment will apply. The designation must be made at the time of payment, because application is part of the act of paying and should not be changed unilaterally after the creditor has relied on it.

The debtor's right is subject to limitations. The debtor may not apply payment to a debt that is not yet due if the period was established for the creditor's benefit or for both parties without the creditor's consent. The debtor may not apply payment to principal before interest when interest is due, unless the creditor agrees.

If the debtor does not make a valid application, the creditor may state the application in the receipt. If the debtor accepts the receipt without objection, the creditor's application generally controls, subject to rules on mistake, fraud, inequitable surprise, and invalid application.

If neither debtor nor creditor makes a valid application, payment is applied to the most onerous debt. A debt may be more onerous because it bears interest, is secured by a mortgage or pledge, carries penalties, exposes the debtor to more serious consequences, is already in default, or is otherwise more burdensome under the circumstances.

If the debts are of the same nature and equally onerous, payment is applied proportionately. Proportional application avoids arbitrary preference when no legal or factual basis exists for choosing one debt over another.

Dation in Payment

Dation in payment is a special form of payment in which the debtor alienates property to the creditor in satisfaction of a money debt or another obligation capable of being satisfied by the transfer. It is treated as a sale in important respects because the creditor receives ownership of a thing as the equivalent of the credit.

Dation requires a subsisting obligation, an agreement that a different object will be accepted in satisfaction, delivery or transfer of the thing, and the creditor's acceptance as payment. Without acceptance, the debtor is merely offering a substitute prestation, which the creditor may refuse under the rule on identity of payment.

Dation extinguishes the obligation to the extent agreed by the parties. If the creditor accepts the property as full satisfaction, the debt is extinguished even if the property's value later proves lower. If the agreement values the property only as partial payment, the debtor remains liable for the balance.

Because dation involves alienation, the debtor must have ownership or authority to transfer the property. Warranties, defects in title, and failure of consideration may affect the extent to which the creditor has truly received the agreed satisfaction.

Payment by Cession

Payment by cession occurs when the debtor assigns property to creditors so they may sell it and apply the proceeds to their credits. It is usually associated with a debtor who cannot pay all obligations in ordinary course and seeks collective liquidation of available assets.

Cession ordinarily requires plurality of creditors, debtor's inability to meet obligations, assignment of property to the creditors, and acceptance by the creditors. It is not the same as ordinary assignment of a credit, because its purpose is liquidation and distribution rather than simple transfer of a right.

Unless the parties agree otherwise, cession does not transfer ownership of the debtor's property to the creditors. It gives the creditors authority to sell or realize upon the property and apply the net proceeds to the debts.

The debtor is released only up to the amount of the net proceeds, unless the creditors agree to accept the cession as full satisfaction. Thus, unlike dation in payment accepted as full payment, cession usually produces partial extinguishment measured by what the property actually yields.

Tender of Payment and Consignation

Tender of payment is the debtor's offer to perform the obligation by delivering what is due. It shows readiness, willingness, and ability to pay, but by itself it generally does not extinguish the obligation when the creditor refuses to accept.

Consignation is the deposit of the thing or sum due with judicial authority after the creditor unjustifiably refuses payment or when the law allows deposit without prior tender. Proper consignation places the prestation under the court's control and can extinguish the obligation.

The usual requisites are a valid and due obligation, tender of payment when required, prior notice to interested persons of the intended consignation, actual deposit of the thing or amount due, and subsequent notice to interested persons that consignation has been made.

Tender must be unconditional, for the full amount or exact prestation due, and made in the proper place and time. A tender coupled with conditions that the creditor is not bound to accept is not equivalent to payment.

Prior tender is unnecessary when the creditor is absent or unknown, when the creditor does not appear at the place of payment, when the creditor is incapacitated to receive payment at the time it is due, when the creditor without just cause refuses to give a receipt, when two or more persons claim the same right to collect, or when the title of the obligation has been lost.

Notice before consignation protects the creditor and other interested persons by giving them a final opportunity to accept payment or assert their rights. Notice after consignation informs them that the thing or amount has been deposited and that the debtor will rely on the deposit as performance.

If consignation is properly made, expenses are charged to the creditor because the creditor's unjustified refusal or legally problematic position made consignation necessary. If consignation is improper, the debtor remains liable and may bear the costs and consequences of nonpayment.

Before the creditor accepts the consignation or before the court declares it proper, the debtor may withdraw the deposit, but the obligation remains in force. Once consignation has produced legal extinguishment, withdrawal with the creditor's authorization may release co-debtors, guarantors, and sureties and may cause the creditor to lose preferences connected with the original credit.

Effects of Payment

Complete and valid payment extinguishes the principal obligation and, as a consequence, extinguishes accessory obligations such as interest, penalties, guaranties, pledges, and mortgages, unless law or agreement preserves a particular consequence.

Partial payment extinguishes the obligation only to the extent paid. The unpaid balance remains demandable according to the contract, applicable interest, acceleration clauses, securities, and remedies available to the creditor.

Payment by a solidary debtor, guarantor, surety, or third person may extinguish the creditor's claim while creating internal rights of reimbursement, contribution, or subrogation. Extinguishment of the creditor's right therefore does not always end all legal relations arising from the debt.

Invalid payment does not extinguish the obligation, but it may produce restitution, reimbursement, damages, estoppel, ratification, or unjust enrichment consequences depending on who paid, who received, what was delivered, and whether the creditor was actually benefited.