Extinction of obligations

• Invalidation


  Contract may only be invalidated at the request of that party. However in case of minors, such parties may be represented by their tutor or guardian to invalidate the contract
• Difference period of limitation

  Invalidation of the contract should be exercised within two years whereas cancellation can be exercised within ten years
• Limitations on reinstatement effects of cancellation and invalidation

  • Impossibility of restoring to the previous position
  • Acts done in performance of the contract shall be upheld if there is impossibility, serious disadvantage or inconvenience of invalidation to cause to one or both parties
  • Monetary compensation or any other remedy which the court thinks fit can be provided to alleviate the inconvenience
• Acts done in performance of a contract


  • Not subjected to invalidation if such invalidation affects the interest of third parties in good faith
• Termination of contract


  Making the contract ineffective starting from the time of termination of the contract
• Types of terminations


  • Bilateral termination (by the agreement of parties)
  • Unilateral termination (by one party)
  • Judicial termination (by court order)
• Bilateral termination


  Putting end to contractual obligations by the agreement of both parties to the contract
• Bilateral termination


  1. Parties may insert such termination clause in their contract or agreed later on

  2. Parties may also put a condition upon the fulfillment of which the contract is terminated
• Unilateral termination


  • Made either by the effect of agreement when such unilateral termination clause is provided in their contract and when a condition which entitles unilateral termination is fulfilled
  • Can also be made by giving notice in advance
• Judicial termination


  Termination of the contractual obligation by court order
• Termination does not have retrospective effect; rather it has prospective effect
• The ground of termination is not attributable to defect in the formation of a contract or non-performance on one of the parties
• Invalidation and cancellation have retrospective effect while the effect of termination is prospective
• Invalidation and cancellation of the contract is not a contract by itself unlike termination of contract which is a contract by itself
• Prospective effect of termination

  The parties are not required to give back what they have given to each other. And they are no more required to carry out their obligation as of the time of termination
• Retrospective effect of cancelation and invalidation of contract

  After invalidation or cancelation there will be an order for restitution that the parties might be in a position they had would have been had the contract not been concluded
• Invalidation, cancellation and termination are the same in that they extinguish contractual obligations
• Remission of debt


  Voluntary release of debtor off his obligation by the creditor
• The mere willingness of the creditor to release the debtor by remission is not enough to make the remission effective and result in extinguishing of obligation. The willingness of the debtor to that effect is also required
• Novation of the contract

  Substitution of an existing obligation by new obligation in its nature or object
• Mere difference without substantial change either in the object or in the nature does not amount to novation; rather it is variation in fact
• Requirements to make effective novation

  • The parties' intention to extinguish the original obligation
  • Creation of substituting obligation in place of original one
• Legal Effect of novation

  • Unless otherwise expressly provided, securities or privileges attached to the original obligation shall not be transferred to the new obligation
  • Unless otherwise expressly provided interest due prior to novation may not be recovered thereafter
  • Novation in its legal effect does not extinguish only the principal obligating but also the accessory ones
  • The effect on period of limitation shall be different from the previous obligation
• Set-off of contractual obligation


  Where two persons owe debts to one another, set off shall occur and the obligation of both persons shall be extinguished
• Positive Conditions to conduct legally effective set-off

  • The debts shall be money debt or fungible things of the same species
  • The debts shall be liquidated
  • The debts shall be due
• Negative conditions for conducting legally effective set-off

  • Set-off shall occur regardless of the cause of either obligation except where the special nature of the obligation requires that the creditor be paid in priority
• Conditions for legally effective set-off

  • Parties should be certain about the debt
  • Parties shall not have a dispute as to the amount of the debt
  • If the amount claimed by the creditor and the amount accepted by the creditor is not equal, the debt requires further liquidation
  • Debt shall be due at the time set-off is required
• Even though one of the debt is not liquidated, the court may decide that set-off shall be made to the extent of the admitted amount
• Negative conditions for conducting legally effective set-off (art 1833)


  • The special nature of the obligation requires that the creditor be actually paid, as in the case of maintenance or wages necessary for the livelihood of the creditor and his family
  • The obligation is owing to state or municipality
  • The obligation is to restore a thing of which the owner has been unjustly deprived
  • The obligation is to return a thing deposited
• Contracting parties are not allowed to set-off their debts if it is going to affect the rights of third parties
• Extinction of obligation by set-off "shall not affect rights which third parties have on one of the debts"
• If the special nature of the obligation harmfully affects one of the parties when set off is carried out, set off is prohibited for such kinds of obligation
• Obligation owing to state or municipality is not subjected to set-off because the action by which the state or municipality become debtor and creditor can be different
• Excluding an obligation to restore a thing unjustly taken from being subject to set-off is to deter unjust deprivation of property and recognize its immoral nature
• When the obligation is to return a thing deposited, it is not again subject to extinction by set-off
• Prescription


  Acquisitive prescription entitles the beneficiary with certain right after the expiry of certain period of time whereas libritive prescription relieves the beneficiary from certain obligations after the lapse of certain period of time
• Limitation of right


  Absolutely extinguishes the right of the other party
• Limitation of action


  Extinguishes the right to bring action i.e. court action
• Article 1845 provides that unless provided by law, action for performance of a contract, action based on non-performance of a contract and action for invalidation of a contract shall be barred if not brought within ten years
• If the remaining last day for the effect of period of limitation is a holiday, the action shall be debarred on the next working day