Payment or Performance

Article 1232. Payment means not only the delivery of money but also the performance, in any other manner, of an obligation. (n)

Obligation to pay by the delivery of money means obligation to pay by delivering that which the law recognizes as money at the time of payment.¹ Under the Civil Code, payment is not exclusively limited to the giving of money. It also includes any manner of performing the obligation with the end in view of extinguishing it. Hence, if A purchases a car from seller B, the former can pay not only in money but also in services provided that B agrees. Also, it must be noted that there are certain presumptions made by law in favor of payment.

Thus, 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.² Also, the receipt of a later installment of a debt, without reservation as to prior installments, shall likewise give rise to the presumption that such installments have been paid.³ These presumptions however can be rebutted by evidence. If the presumption is successfully overturned, the burden of proving that there has been payment rests on the obligor. Hence, it has also been consistently held that the burden of proof to show payment once the debt has been fully established by evidence is on the debtor. Thus in Biala vs. Court of Appeals⁴ where the plaintiff presented promissory notes which were not fully rebutted, the Supreme Court upheld the indebtedness of the obligor by saying:

x x x When the existence of a debt is fully established by the evidence contained in the record, the burden of proving that it has been extinguished by payment devolves upon the debtor who offers such a defense to the claim of the creditor (Chua Chienco vs.

Vargas, 11 Phil. 219, cited in Servicewide Specialists, Inc. vs. Hon.

1Haw Pia vs. China Banking Corporation, G.R. No. L-554, April 9, 1948, 80 Phil.

604.

2Article 1176 of the 1950 Civil Code.

3Id.

4G.R. No. 43503, October 31, 1990, 191 SCRA 50.

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Intermediate Appellate Court, et al., G.R. No. 74553, June 8, 1989, 174 SCRA 80). In the case at bar, all the documents evidencing petitioner’s debts are still in the possession of respondent Lee.

No receipt or other satisfactory evidence was presented by the petitioner to prove the alleged payment to respondent. Promissory notes in the hands of the creditor are proofs of indebtedness rather than proofs of payment (First Integrated Bonding and Insurance Company vs. Isnani, G.R. No. 70246, July 31, 1989, 175 SCRA 753). x x x

Article 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)

Payment contemplates full satisfaction of the debt or the obligation. Complete delivery or service must comprise everything that is necessary to satisfy the obligation consistent with the object of the same. Hence, the obligation to give a determinate thing includes the delivery of all its accessions and accessories, even though they may not have been mentioned.⁵ Payment of a loan with stipulated interest is complete only upon payment of the principal and the interest. Anything less than a complete performance may essentially be considered a breach of the obligation. In Philippine National Bank vs. Court of Appeals⁶ where the PNB paid an alleged attorney-in-fact of the creditor and where there was no proof that the alleged attorney-in-fact was the representative of the creditor, the Supreme Court considered the payment to such person as not effective and further stated:

There is no question that no payment had ever been made to private respondent as the check was never delivered to him.

When the court ordered petitioner to pay private respondent the amount of P32,480.00, it had the obligation to deliver the same to him. Under Article 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 had been completely delivered or rendered, as the case may be.

Article 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)

5Article 1169 of the 1950 Civil Code.

6G.R. No. 108630, April 2, 1996, 78 SCAD 37, 256 SCRA 44.

arts. 1233-1234

Substantial performance of the obligation is not complete performance. It constitutes a breach of the obligation if not for the legal treatment that when such performance occurs, the obligor may recover as though there had been strict and complete fulfillment, less damages suffered by the obligee. In giving the obligee the right to be given damages, the law recognizes the fact that the obligee has been injured and damaged, and that there has been no waiver of such injury or damage by the said obligee. However, the breach in this case is not a material one enough to compel the obligor to rescind the whole obligation. Hence, for the doctrine of substantial per-formance to apply, the part unperformed must not destroy the value or purpose of the contract.⁷ The substantial performance however must have been done in good faith and, in this regard, it has been opined that

the contemporary view, however, is that even a conscious and intentional departure from the contract specifications will not necessarily defeat recovery, but may be considered as one of the several factors involved in deciding whether there has been full performance. The pertinent inquiry is not simply whether the breach was wilfull but whether the behavior of the party in default comports with the standards of good faith and fair dealing. Even an adverse conclusion on this point is not decisive but is to be weighed by other factors, such as the extent to which the owner will be deprived of a reasonably expected benefit and the extent to which the builder may suffer forfeiture, in deciding whether there has been substantial performance.⁸

In Pagsibigan vs. Court of Appeals⁹ where the debtor had, in effect, paid the creditor already more than the original amount of the loan (which was secured by a mortgage) due to the imposition of a high interest rate plus penalty charges and where the debtor, as payment of the remaining balance of P3,558.20, had in effect paid P8,650.00 in addition to the P1,000 it also paid, the Supreme Court ruled that there was substantial compliance on the basis of Article 1234 warranting the cancellation and release of the mortgage. It

7John D. Calamari and Joseph M. Perillo, The Law on Contracts, Third Edition, 1987, West Publishing Company, St. Paul Minn., Page 462, citing Mac Pon Co. vs.

Vinsoni Painting & Decorating Co., 423 So.2d 216 (Ala. 1982); E. Martin Schaeffer vs. Kelton, 95 N.M. 182, 619 P.2d 1226 (1980); Klug & Smith Co. vs. William Sommer and Richard Gebhardt, 83 Wis. 2d 378, 265 N.W. 2d 269 (1978).

8Id., Page 463, citing Vencenzi vs. Cerro, 186 Conn. 612, 442 A.2d. 1352, 1354 (1982).

9G.R. No. 90169, April 7, 1993, 221 SCRA 202.

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likewise quoted the ruling in Angeles vs. Calasanz¹⁰ where rescission was not allowed due to substantial compliance by the debtor on the basis again of Article 1234, thus:

The breach of the contract adverted to by the defendants-appellants is so slight and casual when we consider that apart from the initial downpayment of P392.00 the plaintiff-appellees had already paid the monthly installments for a period of almost nine (9) years. In other words, in only a short time, the entire obligation would have been paid. Furthermore, although the principal obligation was only P3,920.00 excluding the 7 percent interest, the plaintiffs-appellees had already paid an aggregate amount of P4,533.38. To sanction the rescission made by the defendants-appellants will work injustice to the plaintiffs-appellees. It would unjustly enrich the defendants-appellants.

Article 1234 of the Civil Code which provides that 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, also militates against the unilateral act of the defendants-appellants in cancelling the contract.

The obligor may recover as though there had been a strict and complete fulfillment, less damages suffered by the obligee. Thus in the Pagsibigan¹¹ case, the substantial compliance in the payment of the loan warranted the cancellation and release of his mortgaged properties after he was still required to pay some penalties. Also, it has been held that the difference between the value of the house as built and the value it would have had had it been constructed strictly according to the contract was the measure of damages.¹² Other cases state that the defaulting party will be allowed to recover the contract price less the cost of correction of the defects of the unfinished work.¹³ In J.M. Tuason & Co., Inc. vs. Javier,¹⁴ the Supreme Court upheld the decision of the lower court in giving the defaulting-purchaser an extension of time to pay all his obligations to the seller-plaintiff by applying Article 1234 to the situation of the defaulting purchaser, to wit:

10G.R. No. L-42283, March 18, 1985, 135 SCRA 323.

11G.R No. 90169, April 7, 1993, 221 SCRA 202.

12John D. Calamari and Joseph M. Perillo, The Law on Contracts, Third Edition, 1987, West Publishing Company, St. Paul, Minn., Page 463 in footnote 75, citing White vs. Mitchell, 123 Wash. 630, 213 P. 10 (1923); Venzke vs. Magdanz, 243 Wis. 155, 9 N.W.2d 604 (1943).

13Id., Page 464 in footnote 75, citing Bellizzini vs. Huntley Estates, Inc., N.Y.2d 112, 164 N.Y.S.2d 395, 143 N.E.2d 802 (1957).

art. 1234

In this connection, it should be noted that, apart from the initial installment of P396.12, paid upon the execution of the contract, on September 7, 1954, the defendant religiously satisfied the monthly installments accruing thereafter, for a period of almost eight (8) years, or up to January 5, 1962; that, although the principal obligation under the contract was P3,691.20, the total payments made by the defendant up to January 5, 1962, including stipulated interest, aggregated P4,134.08; that the defendant has offered to pay all of the installments overdue including the stipulated interest, apart from reasonable attorney’s fees and the costs; and that, accordingly, the trial court sentenced the defendant to pay all such installments, interest, fees and costs. Thus, plaintiff will thereby recover everything due thereto, pursuant to its contract with the defendant, including such damages as the former may have suffered in consequence of the latter’s default. Under the circumstances, We feel that, in the interest of justice and equity, the decision appealed from may be upheld upon the authority of Article 1234 of the Civil Code.

Article 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)

Unlike in Article 1234, the substantial compliance contemplated in Article 1235 connotes the waiver of the obligee of damages arising from the breach of contract which resulted in the incompleteness or irregularity of the obligation. By not expressing any protest or objection, the obligee accepts the performance of the obligation as fully complied with despite his knowledge of such irregularity or incompleteness.

In Esguerra vs. Villanueva¹⁵ where the debtor claimed that, because the creditor received his partial payments, the creditor was to be considered to have accepted the incompleteness of the perfor-mance, and therefore the obligation should have been considered complied with pursuant to Article 1235, the Supreme Court said that such interpretation was wrong and explained:

Respondents maintain, and the lower court held, that the

“receipt” of said sums of P800.00 and P1,400.00 by the Esguerras constituted “acceptance” of the incomplete and irregular

14G.R. No. L-28569, February 27, 1970, 31 SCRA 829; See also Legarda Hermanos vs. Saldana, G.R. No. L-26578, January 28, 1974, 55 SCRA 324.

15G.R. No. L-23191, December 19, 1967, 21 SCRA 1314.

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performance of respondents’ obligation under the judgment in cases Nos. 1074 and 1075, and that this “acceptance” having been made without any “protest or objection” on the part of the Esguerras, said obligation must be “deemed fully complied with,”

pursuant to Article 1235 of the Civil Code of the Philippines.

This theory is based upon the premise that “receipt” of a partial payment is necessarily an “acceptance” therefor, within the purview of said provision, and that the Esguerras had not protested or objected to said payment. Such premise is untenable.

The verb “accept,” as used in Article 1235, means to take as

“satisfactory or sufficient,” or to “give assent to,” or to “agree”

or “accede” to an incomplete or irregular performance. The circumstances obtaining in the case at bar clearly show that the Esguerras had neither acceded or assented to said payment, nor taken the same as satisfactory or sufficient compliance with the judgment aforementioned.

Indeed, the day immediately following that of the first payment of P800.00 or on December 13, 1962, the Esguerras asked Judge Villanueva to issue the corresponding writs of execution in the two (2) cases. Thus, the Esguerras patently manifested their dissatisfaction with — which necessarily implied an objection or protest to — said partial payment. Moreover, Judge Villanueva must have so understood the reaction of the Esguerras to the same payment, for he was present when it was made, and still he caused the writs to be issued. What is more, the respondents evidently had the same impression, for, otherwise, they would not have paid the additional sum of P1,460.00 on January 5, 1963. Then, again, the insistence of the Esguerras in causing the attached properties of respondents herein to be disposed of, pursuant to the writs of execution, despite said additional payments, leave no room for doubt that the former had never regarded the partial payment as satisfactory compliance with the latter’s obligation under said judgment.

After all, the law does not require the protest or objection of the creditor to be made in a particular manner or at a particular time. So long as the acts of the creditor, at the time of the incomplete or irregular payment by the debtor, or within a reasonable time thereafter, evince that the former is not satisfied with or agreeable to said payment or performance, the obligation shall not be deemed fully extinguished. In the case at bar, the Esguerras had performed said acts within such time.

In Tayag vs. Court of Appeals¹⁶ where the sellers accepted from the purchaser numerous payments in installment of the purchase price of a particular piece of land after the due date and posterior to

art. 1235

the grace periods provided in the contract without any protest as to the delayed payments and where it was even the purchaser who filed a case for specific performance relative to the sale, and who consigned at the same time the balance of the purchase price, the Supreme Court said that the actuation of the sellers was clearly a waiver of his right to rescind the contract and that, on the basis of Article 1235 of the Civil Code, he was likewise estopped from reneging their commitment on account of acceptance of benefits arising from overdue accounts of the purchaser.

Pertinently, if a party fails to interpose any objection to the entries or conditions in an invoice furnished to him by the other party, such failure can be considered as implied acceptance and therefore he will be liable to pay the amount stated therein.¹⁷

Article 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)

Article 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)

Article 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 made by a third person and accepted by the creditor can extinguish an indebtedness or an obligation. The good faith or the bad faith of the third person is immaterial. However, whether or not the one who paid completely acquires the rights of the creditor as against the debtor depends on whether or not the payment has been

16G.R. No. 96053, March 3, 1993, 219 SCRA 480.

17Naga Development Corporation vs. Court of Appeals, G.R. No. L-28173, September 30, 1971, 41 SCRA 105; Pan Pacific Company vs. Philippine Advertising Corporation, G.R. No. L-22050, June 13, 1968; Brillo Handicrafts, Inc. vs. Court of Appeals, 73 SCAD 122, 260 SCRA 383.

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made without knowledge or against the will of the debtor. Hence, the following situations can arise:

1) If a third person pays the creditor without the knowledge or against the will of the debtor, the third person can only recover from the debtor to the extent that the debtor has been benefited. As to what is beneficial to the debtor can be invoked only by such debtor and not the creditor. Whether or not it is beneficial to the debtor is determined by the law and not the will of the debtor. The beneficial effects must be determined at the time the payment was made.¹⁸ The third person cannot compel the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty or penalty. Hence, if A is indebted to B in the amount of P500,000 secured by a real estate mortgage on the house of A, and X pays B the said indebtedness in the amount of P500,000 without the knowledge or against the will of A, X can only recover the amount of P500,000 but he cannot compel the creditor to transfer the mortgage to him. Hence, in case A does not pay X, X cannot fore-close on the mortgage to satisfy his claim. However, if the third party who paid is interested in the obligation, such as a gua-rantor, surety, or co-debtor, legal subrogation is presumed¹⁹ and therefore such interested third party-payor can have the right even as to the accessory obligations such as a mortgage. However, the presumption is rebuttable.

Legal subrogation transfers to the person subrogated the credit with all the rights thereto appertaining, either against the debtor or against third persons, be they guarantors, or possessors of mortgages.²⁰

2) If a third person pays the creditor with the know-ledge of the debtor, but over the latter’s objection, then the effect is the same as in No. 1 because the situation is clearly against the will of the debtor.

3) If the third person pays the creditor with the know-ledge and consent of the debtor, the third person can recover from the debtor the amount he paid to the creditor. He can likewise

3) If the third person pays the creditor with the know-ledge and consent of the debtor, the third person can recover from the debtor the amount he paid to the creditor. He can likewise