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Payment by Cession in Obligation and Contract

What is Payment by Cession?

  • Cession (or Assignment): In a legal context, cession means transferring a right from one person (the cedent or assignor) to another (the cessionary or assignee).
  • Payment by Cession: This occurs when a debtor, with the consent of the creditor, transfers ownership of their property to the creditor as a form of fulfillment for an outstanding obligation (debt).

Key Points (under Philippine Law)

  • Governing Law: The primary laws governing cession in the Philippines are found in the Civil Code of the Philippines, specifically Articles 1255 to 1263.
  • Consent: Consent from all parties (debtor, creditor, and potentially third-parties) is generally required for a valid cession.
  • Debtor's Release: After the cession, the debtor's responsibility is limited to the net proceeds of the assigned property. They are released from further liability unless expressly agreed upon in the contract.
  • Third-Party Rights: A cession cannot adversely affect the rights of third parties who weren't involved in the agreement.
  • Warranty: The debtor, by making a cession, implicitly warrants the validity of their rights over the property being assigned.

Cession in Contracts

Cession plays a significant role in contracts in the following ways:

  1. Transferring Contractual Rights: A party to a contract can transfer their rights or benefits under the contract to another person through cession. For example, a contractor may assign the right to receive payment to a financier.
  2. Transferring Contractual Obligations: Less common, but possible, is transferring obligations under a contract. This usually requires consent from all parties and the new party must have the capacity to fulfill the obligations.

Examples of Cession

  • Factoring: A business assigns (cedes) its accounts receivable (money owed to them by customers) to a factoring company in exchange for immediate cash.
  • Construction Contracts: A contractor assigns (cedes) the right to receive payment from a project owner to a bank as security for a loan.
  • Insurance: An insured person assigns (cedes) their rights under an insurance policy to a beneficiary or to a lender as collateral.

Important Considerations

  • Notice: Proper notice of the cession must often be given to third parties who might be affected (such as the debtor's debtor, in the case of assigning accounts receivable).
  • Formalities: Some cessions might require specific formalities, such as a written agreement, or registration depending on the type of right being assigned.

Disclaimer This information is for general understanding and not a substitute for legal advice. It's always advisable to consult a legal professional for specific guidance on how cession applies to your individual circumstances.

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Location: Davao City, Davao del Sur, Philippines

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