Application of payments

Article 1252 of the Civil Code provides:
ART. 1252. He who has various debts of the same kind in favor of one and the same creditor, may declare at the time of making the payment, to which of them the same must be applied. Unless the parties so stipulate, or when the application of payment is made by the party for whose benefit the term has been constituted, application shall not be made as to debts which are not yet due.

If the debtor accepts from the creditor a receipt in which an application of the payment is made, the former cannot complain of the same, unless there is a cause for invalidating the contract. (1172a)
The Civil Code provides four special forms of payment: (a) dation in payment[1]; (b) payment by cession[2]; (c) application of payments[3]; and (d) tender of payment and consignation.[4][5] The first paragraph of Article 1252 discusses the concept of application of payment. There is application of payment if: (a) there is plurality of debts; (b) debts are of the same kind; (c) debts are owed by the same debtor to the same creditor; (d) all debts must be due, unless parties so stipulate, or when application is made by the party for whose benefit the term has been constituted; and (e) payment made by debtor is not sufficient to cover all of his debt.

Furthermore, there are rules on application of payments. They are as follows:

(1) Debtor has the right to select which of his debts he is paying.[6] He must indicate at the time of making payment, and not afterwards, which particular debt is being paid[7];

(2) The right to make the application once exercised is irrevocable unless the creditor consents to the change[8];

(3) If not, the creditor makes the application, by so stating in the receipt that he issues, unless there is cause for invalidating the contract;

(4) If the creditor has not also made the application, or the application is not valid, the application is made by operation of law;

(5) If debt produces interest, the payment is not to be applied to the principal unless the interests are covered[9];

(6) When no application can be inferred from the circumstances of payment, it is applied: (a) to the most onerous debt of the debtor; or (b) if debts due are of the same nature and burden, to all the debts in proportion[10]; and

(7) Rules on application of payment are not applicable to a person whose obligation as a mere surety is both contingent and singular.

Exceptions to these rules are: (a) the debtor’s right to apply payment can be waived and even granted to the creditor if the debtor so agrees[11]; and (b) it cannot be made applicable to a person whose obligation as a mere surety is both contingent and singular. There must be full and faithful compliance with the terms of the contract.[12]

There are also limitations to these rules. In Article 1248, the creditor has the right to refuse partial payment. Article 1453 states that satisfaction of interest first before the principal debt. Also, debtor cannot apply payment to a debt which is not yet liquidated. He cannot choose a debt with a period (established for the creditor’s benefit) before the period has arrived.

[1] Article 1245, Civil Code.

[2] Article 1255, Civil Code.

[3] Article 1252-1254, Civil Code.

[4] Article 1256-1261, Civil Code.

[5] Rabuya. (2019). Obligations and Contracts.

[6] Article 1252, Civil Code.

[7] Powell vs. Phil. National Bank, 54 Phil. 54 (1929).

[8] Bachrach Garage and Taxicab Co. vs. Golingco, 39 Phil. 918 (1919).

[9] Article 1253, Civil Code.

[10] Article 1254, Civil Code.

[11] Premiere Development v. Central Surety, G.R. No. 176246 (2009).