Obligation and contract - extinguishment of obligations

1. Extinguishment of
Obligations

2. Art. 1231.
A. Payment or Performance
B. Loss of thing due
C. Remission
D. Merger
E. Compensation
F. Novation
Other causes of extinguishment of obligations, such as annulment,
recission, fulfillment of a resolutory condition, and prescription, are
governed elsewhere in this Code.

3. Stronghold Insurance Company, Inc., vs.
Republic Asahi Glass Corp.
Where it was claimed that the death of the surety bond principal had
extinguished the surety’s liability under the surety bond, the Court ruled that as
a general rule, the death of either the creditor or the debtor does not
extinguish the obligations and that only obligations that are personal or
are identified with the persons themselves are extinguished by
death…hence, his death did not result in the extinguishment of those
obligations or liabilities, which merely passed on his estate can set up to
wipe out the obligations under the performance bond. Consequently, the
surety cannot use the death of the bond principal to escape its monetary
obligation under its performance bond.

4. Classification Under the Civil Code
Following modes of extinguishment
of obligations:
(1)Payment or performance
(2)Loss of the things due;
(3)Condonation or remission of the
debt;
(4)Confusion or merger of the
rights of creditor and debtor;
(5)Compensation;
(6)Novation;
(7)Annulment;
(8)Rescission;
(9)Fulfillment of a resolutory
condition; and
(10)prescription

5. Art. 1231 (Last Sentence) other modes of extinction are found
and governed in other Articles in the Civil Code
(1) Death;
(2) Compromise;
(3) Resolutory period;
(4) Mutual dissent;
(5) Withdrawal in certain classes of contracts by will of one of the parties, such as in
agency;
(6) Change of civil status; and
(7) Happening of an unforeseen event.

6. A. Payment or
Performance

7. Payment [Concept]
Payment is the performance of pecuniary
obligations or the delivery of a sum of money. In its
legal and juridical acceptation, however, payment
means the effective performance of the agreed
prestation.

8. Rules for Valid Payment
Art. 1233-1235 – integrity;
Art. 1236-1239 – it determines who may make payment;
Art. 1240-1246, 1249, 1250 – identity of the prestation or the objective element
of payment;
Art. 1251 – determination of the proper place of payment; and
Art. 1247 – regulation of application of expenses.

9. Rule No. 1: Integrity of Payment
General Rule
Payment Must be Complete
Rule on Partial Payment
Burden of Proof

10. Bank of the Philippine Islands v. Spouses Royeca
The creditor’s possession of the evidence of debt is proof that
the debt has not been discharged by payment. A promissory
note in the hands of the creditor is a proof of
indebtedness rather than proof of payment. In an action
for replevin by a mortgagee, it is a prima facie evidence that the
promissory note has not been paid. Likewise, an uncancelled
mortgage in the possession of the mortgagee gives rise to the
presumption that the mortgage debt is paid.

11. Exceptions to General Rule
An obligation is extinguished by way of payment only when the thing or service in
which the obligation consists has been completely delivered or rendered, the rule
admits of the following exceptions:
(1) When the obligation has been substantially performed in good faith, the debtor
may recover as though there had been a strict and complete fulfillment less
damages suffered by the creditor; and
(2) When the creditor accepts the performance, knowing its incompleteness and
irregularity, and without expressing any protest or objection, the obligation is
deemed fully complied with.

12. Rule No. 2: Who May Make Payment
Who May Compel Creditor To Accept Payment
Interest in Fulfillment of Obligation
a. Change in Rule
b. Meaning of “Interest In Fulfillment of Obligation”
Effect of Payment By Third Person
Extinguishment of Obligation

13. Right to Reimbursement
A. When third person Has Intention to
Reimbursed
B. When Third Person Has No Intention To
Be Reimbursed.

14. Right to Subrogation
Distinguished From Reimbursement
Subrogation is defined as the transfer of all
the rights of the creditor to a 3rd person, who
thereby acquires all his rights against the
debtor or against 3rd person.

15. Difference of subrogation and reimbursement
(1) In the latter, it covers only the refund of the amount paid; while in the former,
it includes not only the right of reimbursement but, also, the rights of action
against the debtor and other 3rd persons whether they are guarantors or
mortgagees;
(2) In the latter, the person paying for another has only a personal action to recover
for what he has paid without the rights, powers and guaranties attached to the
original obligation; in the former, the person who pays for another acquires not
only the right to be reimbursed for what he has paid but also the other rights
attached to the obligation originally contracted by the debtor.

16. Capacity to Make Payment
Where the person paying has no capacity
to make the payment, the creditor cannot
be compelled to accept it; consignation will
not be proper; in case he accepts it, the
payment will not be valid.

17. Rule No. 3: To Whom Must Payment Be Made
A payment, in order to be effective to discharge an
obligation, must be made to the proper person. Art. 1240
NCC, enumerates the persons to whom payment to
extinguish an obligation should be made: (1) the person in
whose favor the obligation has been constituted; (2) his
successor in interest; or (3) any person authorized to
received it.

18. Capacity of the Payee
In order that payment may be valid, the person to whom it is made
must have the capacity to receive it, meaning, he must have the capacity
to manage or administer his property. According to Art. 1241 (1) NCC,
of the payment is made a person incapacitated to administer his
property, the payment is invalid except:
(1)If he has kept the thing delivered; or
(2)If the payment has been beneficial to him.

19. Rule No. 4: Identity of Prestation
[Concept]
One of the essential ingredients of payment as a
mode of extinguishing obligations is the identity of
the prestation, which means that the very thing due
must be delivered or released.

20. What Must Be Paid
(a)In Determinate Obligation
(b)In Indeterminate Obligation
(c)In Personal Obligation

21. Payment of Debts in Money
(a)Stipulation of Payment in Foreign Currency
(b)Currency Which is Legal Tender in the Philippines
(c)Checks Are Not Legal Tender
(d)If Creditor Accepts Check As Payment
(e)Extraordinary Inflation and Deflation

22. Dation in Payment [Dacion en Pago]
Art. 1245 NCC, dacion en pago is the alienation of
property to the creditor in satisfaction of a debt in
money. Here, the debtor delivers and transmits to
the creditor the former’s ownership over a thing as
an accepted equivalent of the payment or
performance of an outstanding debt.

23. Requisites For Valid Dacion en Pago
Rockville Excel International Exim Corp. v. Culla [602SCRA128 (2009)]
Elements:
(a) Existence of a money obligation;
(b) The alienation to the creditor of a property by the debtor with the consent
of the former; and
(c) Satisfaction of the money obligation of the debtor.

24. Valid Dacion en Pago
(1)There must be the performance of the prestation in lieu of
payment;
(2)There must be some difference between the prestation due
and that which is given in substitution
(3)There must be an agreement between the creditor and
debtor that the obligation is immediately extinguished by
reason of the performance of a prestation different from
that due.

25. Expenses Required by Payment
(a) Extrajudicial Expenses – required by the payment mentioned in Art. 1247
NCC, refer to the expenses which arise out of, or in connection with, the
normal fulfillment of the obligation.
Art. 1247 NCC shall govern;
(1) The parties may freely stipulate as to who shall bear said expenses;
(2) In the absence of stipulation, said expenses shall be for the account of the
debtor.

26. (b) Judicial Expenses – if the expenses required by the
payment are no longer connected with, or arising from,
the normal fulfillment of the obligation, but a
consequence of the judicial proceeding, they are referred
to as judicial expenses. As to judicial expenses or costs,
the same shall be governed by the Rules of Court.

27. Rule No. 5: Proper Place of Payment
The creditor cannot be compelled to accept the
payment if the same is made in a place other than
the proper place of payment.

28. Rules in determining the proper place of
payment
(1) If the place of payment is designated in the obligation, the payment shall
be made in said place;
(2) In the absence of stipulation and the obligation is to deliver a determinate
thing, the payment shall be made in the place where the thing might be at
the time of the constitution of the obligation;
(3) In any other case (or in the absence of stipulation and the obligation is
other than the delivery of a determinate thing), the place of payment shall
be the domicile of the debtor.

29. 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.

30. Application of Payments
Special Forms of Payment under the Civil Code
(1)Dation in payment (Art. 1245);
(2)Payment by cession (Art. 1255);
(3)Application of Payment (Arts. 1252-1254);
(4)Tender of Payment and Consignation (1256-1261)

31. Art. 1254
When the payment cannot be applied in accordance with the
preceding rules, or if application can not be inferred from other
circumstances, the debt which is most onerous to the debtor, among
those due, shall be deemed to have been satisfied.
If the debts due are of the same nature and burden, the payment
shall be applied to all of them proportionately.

32. Art. 1255
The debtor may cede or assign his property to his
creditors in payment of his debts. This cession, unless
there is stipulation to the contrary, shall only release the
debtor from responsibility for the net proceeds of the
thing assigned. The agreements which, on the effect of
the cession, are made between the debtor and his
creditors shall be governed by special laws.

33. Art. 1256
If the creditor to whom tender of payment has been made refuses without just cause to
accept it, the debtor shall be released from responsibility by the consignation of the thing
or sum due.
Consignation alone shall produce the same effect in the following cases:
(1) When the creditor is absent or unknown, or does not appear at the place of payment;
(2) When he is incapacitated to receive the payment at the time it is due;
(3) When, without just cause, he refuses to give a receipt;
(4) When two or more persons claim the same right to collect;
(5) When the title of the obligation has been lost.

34. Effect of Non Acceptance of Payment
Effect of Non-Acceptance of Payment
The creditor’s unjust refusal to accept
payment does not produce the effect of
payment that will extinguish the debtor’s
obligation.

35. Concept Explained
Tender of Payment
Is the definitive act of offering the creditor what is due him or her; together with
the demand that the creditor accepts the same.
Consignation
is the act of depositing the thing due accept or refuses to accept payment and it
generally requires a prior tender of payment.

36. Distinction Between Tender of Payment
and Consignation
Meat Packing Corporation of the Philippines v. Sandiganbayan and Del Carmen v.
Sabordo
Consignation is the act of depositing the thing due with the court or judicial authorities
whenever the creditor cannot accept or refuses to accept payment, and it generally requires a
prior tender of payment. It should be distinguished from tender of payment. Tender is the
antecedent of consignation, that is, an act preparatory to the consignation, which is the
principal, and from which are derived the immediate consequences which the debtor desires
or seeks to obtain. Tender of payment may be extrajudicial, while consignation is necessarily
judicial, and the priority of the first is the attempt to make a private settlement before
proceeding to the solemnities of consignation. Tender and consignation, where validly made,
produces the effect of payment and extinguishes the obligation.

37. Art. 1257. In order that the consignation of the thing due may release
the obligor, it must first be announced to the persons interested in the
fulfillment of the obligation.
The consignation shall be ineffectual if it is not made strictly in
consonance with the provisions which regulate payment.
Art. 1258. Consignation shall be made by depositing the things due at
the disposal of judicial authority, before whom the tender of payment
shall be proved, in a proper case, and the announcement of the
consignation in other cases.
The consignation having been made, the interested parties shall also be
notified thereof.

38. Requisites of a Valid Consignation
1. There Must a Debt Due
2. Unjust Refusal to Accept
3. First Notice
4. Deposit of Payment in Court
5. Last Notices Required
*Two notices required

39. Art. 1259. The expenses of consignation, when properly made, shall be
charged against the creditor.
Art. 1260. Once the consignation has been duly made, the debtor may ask the
judge to order the cancellation of the obligation.
Before the creditor has accepted the consignation, or before a judicial
declaration that the consignation has been properly made, the debtor may
withdraw the thing or the sum deposited, allowing the obligation to remain in
force.
Art. 1261. If, the consignation having been made, the creditor should authorize
the debtor to withdraw the same, he shall lose every preference which he may
have over the thing. The co-debtors, guarantors and sureties shall be released.

40. Effects of Consignation
• Right of the Debtor to Withdraw Deposit
• Right of the Creditor to Withdraw Deposit
• Retroactive Effect of Consignation
• Expenses of Consignation

41. Art. 1262. An obligation which consists in the delivery of a determinate
thing shall be extinguished if it should be lost or destroyed without the
fault of the debtor, and before he has incurred in delay.
When by law or stipulation, the obligor is liable even for fortuitous
events, the loss of the thing does not extinguish the obligation, and he
shall be responsible for damages. The same rule applies when the nature
of the obligation requires the assumption of risk.
Art. 1263. In an obligation to deliver a generic thing, the loss or
destruction of anything of the same kind does not extinguish the
obligation.

42. Art. 1264. The courts shall determine whether, under the
circumstances, the partial loss of the object of the
obligation is so important as to extinguish the obligation.
Art. 1265. Whenever the thing is lost in the possession of
the debtor, it shall be presumed that the loss was due to his
fault, unless there is proof to the contrary, and without
prejudice to the provisions of article 1165. This
presumption does not apply in case of earthquake, flood,
storm, or other natural calamity.

43. Loss in Obligation to Give
This mode of extinguishment is applicable only to
obligation to deliver a determinate thing and does
not apply to obligations to deliver a generic thing.
This rule is based on the principle that the genus of
a thing can never perish. Genus nunquan perit.

44. Rule in Generic Obligations
If the obligation is generic in the sense that the object thereof is
designated merely by its class or genus without any particular
designation or physical segregation from all others of the same class,
the loss or destruction of anything of the same kind even without the
debtor’s fault and before he has incurred in delay will not have the
effect of extinguishing the obligation. This rule is based on the
principle that the genus of a thing can never perish. Genus nunquan perit.

45. Rule in Determinate
Obligation

46. A. Definition of Loss
It is understood that the thing is lost when
it perishes, or goes out of commerce, or
disappears in such a way that its existence
is unknown or it cannot be recovered.

47. •The thing “perishes”
•The thing “goes out of commerce”
•The thing “disappears in such a way that
its existence is unknown”
•The thing “cannot be recovered”

48. B. Effect of Loss of Determinate Thing Due
In order that the loss will extinguish the obligation and exempt the
obligor from any further liability, the following requisites must concur:
(1)The loss occurs without the fault of the debtor;
(2)The loss occurs prior to the debtor incurring delay; and
(3)There is no law or stipulation holding the debtor liable even in case
of fortuitous event, or that the nature of the obligation does not
require the assumption of risk.
**if the requisites are not present, the obligation to deliver determinate
thing is not extinguished, instead, the obligation is converted into
payment to damages.

49. The Obligation to be Extinguished by
Reason the Loss of the Determinate Thing
(1)By fortuitous event
(2)Due to the fault of a third person
*the loss should be without the fault of the third
person.

50. Exception to the application of the defense of fortuitous events
where the debtor shall remain liable even if the loss is by reason of
fortuitous event in the following instances:
(1)When the law expressly provides for liability even for fortuitous
event;
(2)When the stipulation of the parties expressly provides for liability
for fortuitous event; and
(3)When the nature of the obligation requires the assumption of risk.
When the same thing is sold by the same seller to two or more
persons, the loss of the thing by reason of fortuitous event does not
excuse the seller from his liabilities to the various buyers with whom
he contracted with.

51. C. Applicability of Rule to Reciprocal
Obligations
In the case of Chrysler Philippines Corp. vs. Court of
Appeals (1984), the Court applied the principle of “res perit
domino.” The Court held that before the delivery, the risk of
loss is borne by the seller who is still the owner, under the
principle of “res perit domino” (['the thing is lost to the
owner’] This phrase is used to express that when a thing is
lost or destroyed it is lost to the person who was the owner
of it at the time.).

52. Effect of Partial Loss
Even though the code contemplates total loss or destruction of a
determinate thing subject to the obligation to give, partial loss can
be declared as an extinguishment of obligation if such loss is so
important, the courts may declare the extinguishment of the
obligation.
Presumption That Loss is Due to Debtor’s Fault
Legal presumption is that the loss is due to the debtor’s fault when
the determinate thing due is lost in his possession. However, it will
not apply when: (1) there is proof to the contrary; and (2) when the
loss occurs during an earthquake, flood, storm or other natural
calamity.

53. ARTICLE 1266. The debtor in obligations to do
shall also be released when the prestation
becomes legally or physically impossible without
the fault of the obligor.
ARTICLE 1267. When the service has become
so difficult as to be manifestly beyond the
contemplation of the parties, the obligor may also
be released therefrom, in whole or in part.

54. Concept of Loss In Obligation To Do
Impossibility of Performance
Art. 1266 is one of the recognized exceptions to the principle of the obligatory force of
contract. The article is only applicable only to the obligations “to do”, and not to obligations
“to give.”
The “impossibility of performance” supervenes after the constitution of the obligation or
during its performance. The impossibility referred to by the article is either a physical or legal
impossibility.
There is physical impossibility when the act by reason of its nature cannot be
accomplished. Physical impossibility may also proceed principally from the death of the
obligor.
There is legal impossibility when the act by reason of a subsequent law is prohibited, such
as when the contract involves child labor and a law is subsequently passed prohibiting the
same.

55. Doctrine of Unforeseen
Events (Art. 1267 CC)
“The general rule is that impossibility of performance releases
the obligor. However, it is submitted that when the service has
become so difficult as to be manifestly beyond the
contemplation of the parties, the court should be authorized to
release the obligor in whole or in part. The intention of the
parties should govern and if it appears that the service turns out
to be so difficult as to have been beyond their contemplation, it
would be doing violence to that intention to hold the obligor still
responsible.” (Naga Telephone Company Inc., vs. Court of
Appeals, 230 SCRA 351, 1994)

56. Art. 1267 is based on the theory of rebus sic stantibus, the parties stipulate
in the light of certain prevailing conditions, and once these conditions
cease to exist, the contract also ceases to exist. This theory is said to be the
basis of Article 1267 of the Civil Code, which provides:
Art. 1267. When the service has become so difficult as to be manifestly beyond the
contemplation of the parties, the obligor may also be released therefrom, in whole
or in part.
This article, which enunciates the doctrine of unforeseen events, is not,
however, an absolute application of the principle of rebus sic stantibus,
which would endanger the security of contractual relations. The parties to
the contract must be presumed to have assumed the risks of unfavorable
developments. It is therefore only in absolutely exceptional changes of
circumstances that equity demands assistance for the debtor.

57. Art. 1267 speaks of ”service” which has become so difficult. The difficulty of
performance under the said article should be such that one party would be placed at a
disadvantage by the unforeseen event. Mere inconvenience, or unexpected
impediments, or increase expenses did not suffice to relieve the debtor from a bad
bargain.
In Tagaytay Realty Inc., vs. Gacutan 2015, the Court held that in order for Art.
1267 to apply, the following conditions should concur, namely:
(a) the event or change in circumstances could not have been foreseen at the time of
the execution of the contract;
(b) it makes the performance of the contract extremely difficult but not impossible;
(c) it must not be due to the act of any of the parties; and
(d) the contract is for a future prestation.

58. Obligation to Deliver Determinate Thing
Arising from Crime
When the obligation to deliver a determinate thing arises from a crime, loss
of the thing due to any cause, whether through the fault of the debtor or
through fortuitous event, does not extinguish the obligation.
When the obligation to deliver a determinate thing arises from a crime and
the creditor refuses without justification to accept its delivery, the debtor has
two alternative remedies: (1) To consign the thing and thereby relieve
himself from any further responsibility for such thing; or (2) to just keep the
thing in his possession, with the obligation to exercise due diligence, subject
to the general rules of obligations, but no longer to the special liability
imposed by the above article.

59. Right of Creditor to Exercise All
Rights of Debtor (Art. 1269)
When the thing is lost by reason of an act of a 3rd person and
without the fault of the debtor, and before he has incurred in delay,
the obligation is extinguished.
It is only the creditor who is granted the right of action to claim
indemnity from the 3rd person, for otherwise the debtor would
unjustly be enriched by such loss if his obligation is extinguished,
and, at the same time, he can still recover indemnity from another.

60. Condonation
(Remission) and
Confusion (Merger)
[Art. 1270 - 1277]

61. Condonation or Remission of the Debt
ARTICLE 1270. Condonation or remission is essentially gratuitous, and requires the acceptance by the
obligor. It may be made expressly or impliedly.
One and the other kinds shall be subject to the rules which govern inofficious donations. Express
condonation shall, furthermore, comply with the forms of donation.
ARTICLE 1271. The delivery of a private document evidencing a credit, made voluntarily by the
creditor to the debtor, implies the renunciation of the action which the former had against the latter.
If in order to nullify this waiver it should be claimed to be inofficious, the debtor and his heirs may
uphold it by proving that the delivery of the document was made in virtue of payment of the debt.
ARTICLE 1272. Whenever the private document in which the debt appears is found in the possession
of the debtor, it shall be presumed that the creditor delivered it voluntarily, unless the contrary is
proved.
ARTICLE 1273. The renunciation of the principal debt shall extinguish the accessory obligations; but
the waiver of the latter shall leave the former in force.
ARTICLE 1274. It is presumed that the accessory obligation of pledge has been remitted when the
thing pledged, after its delivery to the creditor, is found in the possession of the debtor, or of a third
person who owns the thing.

62. Definition
Remission is an act of liberality by which the creditor, who receives no
price or equivalent thereof, releases the debtor from the obligation, either
in whole or in part, upon the latter’s consent. The only consideration for
the release of the debtor from the obligation is the pure liberality of the
creditor.
If an equivalent is given, it ceases to be a remission and becomes either
dation in payment, if the creditor receives a thing different from that
stipulated; or novation, if the object or principal condition is changed; or
compromised, when there is an exchange of concessions to avoid a
litigation or to put an end to one already commenced.

63. Remission can be done either by way of an act of inter
vivos or mortis causa. If the remission is intended to be
effective during the creditor’s lifetime, the same is
essentially a donation. If the intention is to be effective
only after the creditor’s death and by reason of his death,
the same is essentially a legacy of credit. The debtor’s
consent is necessary in order for the remission to be valid
and effective. The reason is one cannot impose his own
generosity upon another person.

64. Requisite: In order to be valid, the ff. requisites must be present:
1. The parties must have the requisite capacity. If the remission is inter vivos, which is
a donation, the parties must have the capacity to make and accept donations. If the
remission is mortis causa, the parties must have the capacity to make a will and to
inherit.
2. It must be gratuitous; otherwise it will become either dation in payment, novation
or compromise.
3. It must be accepted by the debtor, whether done through an act inter vivos or
mortis causa.
4. It must not amount to an inofficious donation or legacy.
5. If it is made expressly, it must comply with the forms of donation, if done through
an act inter vivos; or with the formalities of a will, if done through an act mortis
causa.

65. Kinds of Remission
1. As to form:
A) Express – where the consent is given explicitly and it is required to be made in a certain
form;
B) Implied – where consent can be inferred from the acts of the parties
2. As to effectivity
A) Inter vivos – when it takes effect during the lifetime of the creditor;
B) Mortis Causa – when it takes effect after the death of the creditor;
3. As to extent
A) Total – if the remission involves the entire obligation;
B) Partial – which may either be a remission of a part of the amount, a part of the obligation
(such as the accessory obligation of pledge), or an aspect of the obligation (such as
solidarity).

66. Presumption of Remission
Art. 1271 -1272 of the Civil Code provide for a presumption
of remission. The presumption of remission is applicable
only to a private document evidencing the credit. Ordinarily,
the document evidencing the indebtedness is in the
possession of the creditor until the obligation is discharged.
Effects of Remission of Principal or Accessory
Obligation
(Art. 1273) The remission of the principal debt also results
in the extinguishment of the accessory obligations; but the
remission of the latter does not affect the former.

67. • CONFUSION OR MERGER OF RIGHTS
• Art. 1275. The obligation is extinguished from the time the
• characters of creditor and debtor are merged in the same
• person. (1192a)
• Art. 1276. Merger which takes place in the person of the
• principal debtor or creditor benefits the guarantors.
• Confusion which takes place in the person of any of the
• latter does not extinguish the obligation. (1193)
• Art. 1277. Confusion does not extinguish a joint obligation
• except as regards the share corresponding to the creditor
• or debtor in whom the two characters concur. (1194)

68. Confusion or Merger
- is the meeting in one person of the qualities of
creditor and debtor with respect to the same obligation.
Effect of Merger in Joint Obligation
If merger takes place in a joint obligation, it does not
extinguish the obligation “except as regards the share
corresponding to the creditor or debtor in whom the
two characters concur.”

69. COMPENSATION

70. Art. 1278. Compensation shall take place when two
persons, in their own right, are creditors and debtors of
each other. (1195)
Compensation is a mode of extinguishing to the
concurrent amount the obligations of person who in
their own right and as principals are reciprocally debtors
and creditors of each other.

71. Kinds of Compensation
(1) Total – when the two obligations are of the same amounts and compensation operates
fully extinguishing both obligations; or
(2) Partial – when the two obligations are of different amounts and a balance remains.
• Legal Compensation is that which takes place by operation of law when all the requisites
are present.
• Voluntary or Conventional Compensation is that which takes place when the parties
agree to compensate their mutual obligations even in the absence of some requisites.
• Judicial Compensation is that which takes place by virtue of an order of the court where
the counterclaim of the defendant is allowed to be set-off against the claim of the plaintiff.
• Facultative is when it can be claimed by the party who can oppose it and who is the only
party prejudiced by the compensation as happens when one of the obligations has a period
for the benefit of one party alone and the latter renounces the period with the effect of
making the obligation die and therefore compensable.

72. Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the
same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the latter
has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the debtor.
(1196)
Art. 1280. Notwithstanding the provisions of the preceding article, the
guarantor may set up compensation as regards what the creditor may owe the
principal debtor. (1197)

73. Requisites of Legal Compensation
(1) That the parties are mutually creditors and debtors of each other,
in their own right and as principals;
(2) That both debts consist in a sum of money, or if the things due
are consumable, they be of the same kind, and also of the same
quality if the latter has been stated;
(3) That both debts be due;
(4) That both debts be liquidated and demandable; and
(5) That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the
debtor.

74. Requisite No. 1: As to Parties
For compensation to takes place, the parties must:
(a) Mutual debtors and creditors of each other;
Requires confluence in the parties of the characters of mutual debtors and creditors, although
their rights as such creditors or their obligations as such debtors need not spring from one
and the same contract or transaction.
(b) In their own right; and
Legal compensation cannot take place if the parties are not, in their own right, reciprocally
creditors and debtors of each other. Hence, of a party has a debt or credit in his personal
capacity, it cannot be compensated by a claim or debt in his representative capacity.
(c) As principals
The parties must be bound principally in order for legal compensation to take place. Hence,
there can be no legal compensation if one is a mere guarantor in one of the obligation.

75. Requisite No. 2: As to Objections
Both debts must consist:
(a) In payment of a sum of money; or
(b) In the delivery of fungibles.
Requisite No. 3: As to Maturity
Legal compensation cannot take place unless both debts are already due. Hence,
obligations with a suspensive condition or with a suspensive term cannot be
compensated prior to the fulfillment of the condition or the arrival of the day certain.
Requisite No. 4: As to demandability and liquidation
In order for legal compensation to take place, both debts must also be demandable
and liquidated. Hence, if one of the obligations is a natural obligation, void, or
unenforceable, it cannot be compensated because it is not a demandable debt.

76. Requisite No. 5: Absence of Retention or Controversy
Legal compensation cannot take when there is a retention or
controversy involving one of the mutual obligations
commenced by a third person and communicated in due time to
the debtor.
Debts Payable at Different Places
If the foregoing requisites are present, compensation shall take
place by operation by law even though the debts may be payable
at different places.

77. Art. 1281. Compensation may be total or partial. When the two debts are of the same amount, there is a
total compensation. (n)
Art. 1282. The parties may agree upon the compensation of debts which are not yet due. (n)
Art. 1283. If one of the parties to a suit over an obligation has a claim for damages against the other, the
former may set it off by proving his right to said damages and the amount thereof. (n)
Art. 1284. When one or both debts are rescissible or voidable, they may be compensated against each
other before they are judicially rescinded or avoided. (n)
Art. 1285. The debtor who has consented to the assignment of rights made by a creditor in favor of a
third person, cannot set up against the assignee the compensation which would pertain to him against the
assignor, unless the assignor was notified by the debtor at the time he gave his consent, that he reserved
his right to the compensation.
If the creditor communicated the cession to him but the debtor did not consent thereto, the latter may
set up the compensation of debts previous to the cession, but not of subsequent ones.
If the assignment is made without the knowledge of the debtor, he may set up the compensation of all
credits prior to the same and also later ones until he had knowledge of the assignment. (1198a)

78. Effect of Assignment of Credit
Concept of Assignment of Credit
An assignment of credit has been defined as an
agreement by virtue of which the owner of a credit
(known as the assignor), by a legal cause – such as sale,
dation in payment or exchange or donation – and
without need of the debtor’s consent transfers that credit
and its accessory rights to another, who acquires the
power to enforce it , to the same extent as the assignor
could have enforced it against the debtor.

79. Art. 1286. Compensation takes place by operation of law, even
though the debts may be payable at different places, but there shall
be an indemnity for expenses of exchange or transportation to the
place of payment. (1199a)
Art. 1287. Compensation shall not be proper when one of the debts
arises from a depositum or from the obligations of a depositary or
of a bailee in commodatum.
Neither can compensation be set up against a creditor who has a
claim for support due by gratuitous title, without prejudice to the
provisions of paragraph 2 of Article 301. (1200a)
Art. 1288. Neither shall there be compensation if one of the debts
consists in civil liability arising from a penal offense. (n)

80. Debts Which Cannot Be Compensated
Debts which are not susceptible to legal compensation:
(1) Debts arising from contracts of depositum;
(2) Debts arising from contracts of commodatum;
(3) Claims for support due by gratuitous title; and
(4) Debts consisting in civil liability arising from a penal
offense.

81. Art. 1289. If a person should have against him several debts which are
susceptible of compensation, the rules on the application of payments
shall apply to the order of the compensation. (1201)
Art. 1290. When all the requisites mentioned in Article 1279 are present,
compensation takes effect by operation of law, and extinguishes both
debts to the concurrent amount, even though the creditors and debtors
are not aware of the compensation. (1202a)
Effects of Legal Compensation
Article 1290 of the Civil Code provides that when all the requisites
mentioned in Article 1279 are present, compensation takes effect by
operation of law, and extinguishes both debts to the concurrent amount,
even though the creditors and debtors are not aware of the compensation.

82. NOVATION

83. Art. 1291. Obligations may be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor. (1203)
Novation is the extinguishment of an obligation by the substitution
or change of the obligation by the substitution or change of the
obligation by a subsequent one which extinguishes or modifies the
first, either by changing the object or principal conditions, or by
substituting the person of the person of the debtor, or by
subrogating a third person to the rights of the creditor.

84. Kinds of Novation:
1. Extinctive (total novation), when an old obligation is terminated by the creation of a new
one that takes place of the former.
Modificatory (partial novation), when the obligation subsists to the extent that it remains
compatible with the amendatory agreement.
2. Objective Novation (real novation), when there is a change of the object, cause or
principal conditions of an existing obligation.
Subjective Novation (personal novation), when there is a change of either the person of the
debtor, or of the creditor in an existing obligation.
Mixed Novation, when the change of the object, cause or principal conditions of an
obligation occurs at the same time with the change of either in the person of the debtor or
creditor.
3. Express when the new obligation declares in unequivocal terms that the old obligation is
extinguished.
Implied when the new obligation is incompatible with the old one on every point.

85. Requisites of Novation
(1) There must be a previous valid obligation;
It is necessary that the original obligation exists and that the same is valid.
Valid novation even if the original obligation is voidable in two instances:
a. When there has been a ratification of the obligation of its defects from the very beginning; or
b. If the defect can be claimed only by the debtor because when he consents to the novation, he renounces his
right to annul the old obligation.
(2) There must be an agreement of the parties concerned to a new contract;
Novation requires the creation of new contractual relations, as well as the extinguishment of old.
(3) There must be extinguishment of the old contract; and
An obligation may be extinguished by another which substitute the same, it is imperative that it be so declared in
unequivocal terms, or that the old and the new obligations be on every point incompatible with each other.
(4) There must be the validity of the new contract.
If the new obligation is void, the extinguishment of the original obligation is not realized, because that which is
null and void cannot produce any effect. Hence, there is no novation.

86. Art. 1292. In order that an obligation may be extinguished by another which substitute
the same, it is imperative that it be so declared in unequivocal terms, or that the old
and the new obligations be on every point incompatible with each other. (1204)
Art. 1293. Novation which consists in substituting a new debtor in the place of the
original one, may be made even without the knowledge or against the will of the latter,
but not without the consent of the creditor. Payment by the new debtor gives him the
rights mentioned in Articles 1236 and 1237. (1205a)
Art. 1294. If the substitution is without the knowledge or against the will of the
debtor, the new debtor's insolvency or non-fulfillment of the obligations shall not give
rise to any liability on the part of the original debtor. (n)
Art. 1295. The insolvency of the new debtor, who has been proposed by the original
debtor and accepted by the creditor, shall not revive the action of the latter against the
original obligor, except when said insolvency was already existing and of public
knowledge, or known to the debtor, when the delegated his debt. (1206a)

87. Substitution of Debtor
Expromission and Delagacion
Expromission, the initiative for the changes does not emanate from
the old debtor and it may even be made without the knowledge or
consent, since it consists in a third person assuming his obligation.
Delagacion, the debtors offers and the creditor accepts a third person
who consents to the substitution so that the intervention and the
consent of these three persons are necessary and they are
respectively know as delegante (original debtor), degatario (creditor),
and delegado (new debtor). The consent need not be given
simultaneously and that it may be given afterwards.

88. Consent of the Creditor
Whether the substitution of the debtor is made through
expromision or delegacion, the consent of the creditor is an
indispensable requirement.
Effect of Non-fulfillement or Insolvency of New Debtor
Whether the substitution of the debtor is made through
expromision or delegacion, the effect is the same, that is, the release
of the original debtor from the obligation. Hence, if the new debtor
fails to fulfill his obligation to the creditor for whatever reason, even
by reason of his insolvency, the same shall not ordinarily give rise to
any liability on the part of the original debtor.

89. Art. 1296. When the principal obligation is extinguished in consequence of
a novation, accessory obligations may subsist only insofar as they may
benefit third persons who did not give their consent. (1207)
Art. 1297. If the new obligation is void, the original one shall subsist, unless
the parties intended that the former relation should be extinguished in any
event. (n)
Art. 1298. The novation is void if the original obligation was void, except
when annulment may be claimed only by the debtor or when ratification
validates acts which are voidable. (1208a)
Art. 1299. If the original obligation was subject to a suspensive or
resolutory condition, the new obligation shall be under the same condition,
unless it is otherwise stipulated. (n)

90. Effect of Novation on Conditional Obligations
When Original Obligation Is Conditional
If the original obligation is subject to a suspensive or
resolutory condition, the new obligation must necessarily be
subject to the same condition.
When Both Obligations Are Conditional
If both the old and new obligations are subject to different
conditions, the effect is determined by the compatibility or
incompatibility of the conditions.

91. SUBROGATION

92. Art. 1300. Subrogation of a third person in the rights of the creditor is either legal or
conventional. The former is not presumed, except in cases expressly mentioned in this
Code; the latter must be clearly established in order that it may take effect. (1209a)
Art. 1301. Conventional subrogation of a third person requires the consent of the
original parties and of the third person. (n)
Art. 1302. It is presumed that there is legal subrogation:
(1) When a creditor pays another creditor who is preferred, even without the debtor's
knowledge;
(2) When a third person, not interested in the obligation, pays with the express or tacit
approval of the debtor;
(3) When, even without the knowledge of the debtor, a person interested in the
fulfillment of the obligation pays, without prejudice to the effects of confusion as to
the latter's share. (1210a)

93. Subrogation Definition
Subrogation is another form of extinctive subjective novation which takes place when there is
a change in the person of the creditor.
Conventional Subrogation
(a) Concept – Conventional obligation is that which takes place by agreement of the parties.
Article 1300 CC provides that “conventional subrogation of a third person requires the
consent of the original parties and of the third person.” Therefore, it requires an agreement
among the parties concerned – the original creditor, the debtor, and the new creditor.
(b) Distinguish From Assignment of Credit – A creditor may also transfer all his rights to
a third person by way of an assignment of credit, An assignment of credit has been defined as
an agreement by virtue of which the owner of a credit (knowns as assignor), by a legal cause
and without need of the debtor’s consent, transfer that credit and its accessory rights to
another (known as assignee), who acquires the power to enforce it, to the same extent as the
assignor could have enforced it against the debtor.

94. Legal Subrogation
Is that which takes place without agreement but by operation of law
because of certain acts.
Art. 1303. Subrogation transfers to the persons subrogated the credit
with all the rights thereto appertaining, either against the debtor or
against third person, be they guarantors or possessors of mortgages,
subject to stipulation in a conventional subrogation. (1212a)
Art. 1304. A creditor, to whom partial payment has been made, may
exercise his right for the remainder, and he shall be preferred to the
person who has been subrogated in his place in virtue of the partial
payment of the same credit. (1213)

95. Effects of Subrogation
In Case of Total Subrogation
The effects of subrogation are to be distinguished from that of an assignment of
credit and its accessory rights.
The accessory rights does not at all obliterate the obligation of the debtor, but merely
puts the assignee in the place of his assignor. In both, however, there is a transfer of
all the rights of the creditor to a third person.
In Case of Partial Subrogation
The law allows partial subrogation, as when the third person only made a partial
payment to the creditor.
The creditor may still exercise his right with respect to the remainder of the debt
while the third person may exercise his right up to the extent of what he had paid to
the creditor.