SECTION 4 CONFUSION OR MERGER OF RIGHTS

1275. The obligation is extinguished from the time the characters of creditor and debtor are
merged in the same person. (1192a)

 Merger or confusion is the meeting in one person of the qualities of creator and debtor
with respect to the same obligation. It erases the plurality of subjects of the obligation.
Further, the purposes for which the obligation may have been created are considered
as fully realized by the merger of the qualities of debtor and creditor in the same
person.

REQUISITES OF MERGER OR CONFUSION ARE:

(1) It must take place between the creditor and the principal debtor,
(2) the very same obligation must be involved, for if the debtor acquires rights from the creditor, but not
the particular obligation in question in question there will be no merger,
(3) the confusion must be total or as regards the entire obligation.

 The effect of merger is to extinguish the obligation.

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)

Effect of Merger

This article reiterates the principles established in Articles 1176, 1274, NCC, that accessory follows the
principal.

The extinguishment of the principal obligation extinguishes the accessory obligation; but the
extinguishment of the accessory does not extinguish the principal obligation

Ex. Richard obtains P10, 000 loan from Laila which loan was guaranteed by Rhorie. Later, Laila
assigned the credit to Tonix, who in turn assigned it to Richard. The principal debt is extinguished and
Rhorie is released from his obligation as guarantor.

If, in this same example, the credit was assigned by Laila to Tonix and Tonix to Rhorie. The contract of
guaranty is extinguished but the principal obligations remains. Richard has now the obligation to pay
Rhorie.

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)

Effect of Merger in Joint Obligation

 In a joint obligation, the debts are distinct and separate from each other. In case there is
merger in a joint obligation, it affects only the share corresponding to the creditor or debtor in
whom the two characters concur. The co-debtor will not owe his corresponding share to this
former joint co-debtor.

Ex. Jack, Sky and Tonix are jointly indebted to Lance in the amount of P15, 000. Lance assigns his
credit to Tony who in turn assigned it to Jack. There is here a merger between Jack and Lance but Sky
and Tonix would now owe Jack P5, 000 each.
 SECTION 5. – Compensation

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 those persons who
in their own right are reciprocally debtors and creditors of each other. It is the offsetting of two obligations
which are reciprocally extinguished if they are of equal value. Or extinguished to the concurrent amount if
of different values.

Kinds of Compensation:
 As to their effects
I. compensation may be total (when the two obligations are of the same amount); or
II. partial (when the amounts are not equal).
 As to origin
I. Legal;
II. Facultative;
III. Conventional;
IV. Judicial

 It is legal when it takes place by operation of law because all requisites are present.
 It is facultative when it can be claimed by one of the parties, who, however, has the right to
object to it, such as when one of the obligations has a period for the benefit of one party alone
and who renounces that period so as to make the obligation due.
 It is conventional when the parties agree to compensate their mutual obligations even if some
requisite is lacking.
 It is judicial when decreed by the court in a case where there is a counterclaim.

Compensation vs. Payment: In compensation, there can be partial extinguishment of the obligation; in
payment, the performance must be completer, unless waived by the creditor. Payment involves delivery
of action, while compensation (legal compensation) takes place by operation of law without simultaneous
delivery.

Compensation vs. Merger: In compensation, there are at least two persons who stand as principal
creditors and debtor of each other, in merger, there is only one person involved in whom the characters
of creditor and debtor are merged. In merger, there is only one obligation, while in compensation, there
are two obligations involved.

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)

Requisites of a Proper Compensation or Legal Compensation:

i. The parties are principal creditor and principal debtor of each other;
ii. Both debts consists in a sum of money or of consumable things of the same kind and quality;
iii. The two debts are due and demandable;
iv. The two debts liquidated; and the liquidated means that the amount of debt has already been
fixed and determined, while the word demandable means when it is due;
v. There be no retention or controversy means a third person who is claiming to be a creditor.
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)

 The liability of the guarantor is only subsidiary; it is accessory to the principal obligation of the
debtor. If the principal debtor has a credit against the creditor, which can be compensated, it
would mean the extinguishment of the guaranteed debt, either totally or partially. This
extinguishment benefits the guarantor, for he can be held liable only to the same extent as the
debtor.

Exception to the Rule On Compensation: Right of Guarantor to Invoke Compensation Against

Creditor. The general rule is that for compensation to operate, the parties must be related reciprocally as
principal creditors and debtors of each other. Under the present Article, the guarantor is allowed to set up
compensation against the creditor.

Art. 1281. Compensation may be total or partial. When the two debts are of the same amount,
there is a total compensation. (n)

Ex. Karl is indebted to Vladz the amount of P10, 000 due on Dec. 19, 2000. Vladz is likewise indebted
to Karl in the amount of P10, 000 due on Dec. 19, 2000. There is here a total compensation; hence, both
debts will be extinguished.

Partial compensation- is when the amount are not the same after compensation took place, there is a
balance remains.

Ex. Karl owes Vladz P10, 000 due on Dec. 19, 2010. On the other hand, Vladz owes Karl P6,000 due
also on Dec. 19, 2010 and when the due date arrives, there is a balance of P4, 000 that will remain after
compensation takes place.

1282. The parties may agree upon the compensation of debts which are not yet due. (n)

 Voluntary compensation is not limited to obligations which are not yet due. The parties may
compensate by agreement any obligations, in which the objective requisites provided for legal
compensation are not present. It is necessary, however, that the parties should have the
capacity to dispose of the credits which they compensate, because the extinguishment of the
obligations in this case arises from their wills and not from law.

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)

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)

 Although a rescissible or voidable debt can be compensated before it is rescinded or

annulled, the moment it is rescinded or annulled, the decree of rescission or annulment is
retroactive, and the compensation must be considered as cancelled.
 Recission of annulment requires mutual restitution; the party whose obligation is annulled or
rescinded can thus recover to the extent that his credit was extinguished by the
compensation, because to that extent he is deemed to have made a payment.
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)

 Assignment after Compensation:

When compensation has already taken place before the assignment, inasmuch as it takes place ipso
jure, there has already been an extinguishment of one of the other of the obligations. A subsequent
assignment of an extinguished obligation cannot produce any effect against the debtor. The only
exception to this rule is when the debtor consents to the assignment of the credit; his consent constitutes
a waiver of the compensation, unless at the time he gives consent, he informs the assignor that he
reserved his right to the compensation.

 Assignment before compensation.

The assignment may be made before compensation has taken place, either because at the time of
assignment one of the debts is not yet due or liquidated, or because of some other cause which impedes
the compensation. As far as the debtor is concerned, the assignment does not take effect except from
the time he is notified thereof. If the notice of assignment is simultaneous to the transfer, he can set up
compensation of debts prior to the assignment. If notice was given to him before the assignment, this
takes effect at the time of the assignment; therefore the same rule applies. If he consents to the
assignment, he waives compensation even of debts already due, unless he makes a reservation.

But if the debtor was notified of the assignment, but he did not consent, and the credit
assigned to a third person matures after that which pertains to the debtor, the latter may set
up compensation when the assignee attempts to enforce the assigned credit, provided that
the credit of the debtor became due before the assignment. But it f the assigned credit
matures earlier than that of the debtor, the assignee may immediately enforce it, and the
debtor cannot set up compensation, because the credit is not yet due.
If the debtor did not have knowledge of the assignment, he may set up by way of
compensation all credits maturing before he is notified thereof. Hence, if the assignment is
concealed, and the assignor still contracts new obligation in favor of the debtor, such
obligation maturing before the latter learns of the assignment will still be allowable by way of
compensation. The assignee in such case would have a personal action against the assignor.

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)

Compensation where debts payable at different places

 This legal compensation does not refer to the difference in the value of the things in their
respective places but to the expenses of monetary exchange and expenses of monetary
exchange and expenses in transportation. Once these expenses are liquidated, the debts also
become compensated. The indemnity shall be paid by the person who raises the defense of
compensation.

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)

Instances when legal compensation is not allowed by law:

i. Where one of the debts arises from a depositum- a deposit constituted from the moment a
person receives a thing belonging to another with the obligation of safely keeping it and of
returning it the same.
ii. Where one of the debts arises from a commodatum – Commodatum is a gratuitous contract
whereby one of the parties delivers to another something not consumable so that the latter
may use the same for a certain time and return it.
iii. Where one of the debts arises from a claim for support by gratuitous title- Support
compromises everything that is indispensable for sustenance, dwelling, clothing, medical
attendance, education and transportation, in keeping with the financial capacity of the family
iv. Where one of the debts consists in civil liability arising from a penal clause. “If one of the
debts consists in civil liability arising from a criminal offense, compensation would be improper
and inadvisable because the satisfaction of such obligation is imperative.”

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. (1202)

Compensation takes place automatically by mere operation of law- from the moment all the
requisites mentioned in Art. 1279 concur, compensation takes place automatically even in the
absence of agreement between the parties, and extinguishes reciprocally both debts to the
amount of their respective sums. It takes place by operation of law from the day all the
necessary requisites concur, without need of consent on the part of the parties, and even
without their knowledge

SECTION 6. – Novation

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 extinction of an obligation through the creation of a new one which substitutes it.

Dual function of novation:

Is a contract containing two stipulations; one to extinguish or modify existing obligation, the other to
substitute a new one in its place.
Kinds of novation:
A. According to its object or purpose
1. Real or objective- (changing the object or the principal conditions of the obligation). (Art.
1291, par. 1)
2. Personal or Subjective- (change of persons)
a. Substituting the person of the debtor (Expromision or Delegacion)
b. Subrogating a third person in the rights of the creditor (change of creditor may be by
agreement- “conventional subrogation,” or by operation of law- “legal subrogation”).
3. Mixed (Change of object and parties)

B. According to the form of its constitution

1. Express
2. Implied (when the two obligations are essentially incompatible with each other)

C. According to its extent or effect

1. Total or extinctive novation ( when the old obligation is completely extinguished)
2. Partial or modificatory- (this is also termed imperfect or improper novation)

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)

Requisites of novation:

i. A previous valid obligation

ii. Capacity and intention of the parties to modify or extinguish the obligation
iii. The modification or extinguishment of the obligation
iv. The creation of a new valid obligation

Novation is not presumed. It must be clearly and unmistakably established either by the express
agreement of the parties or acts of equivalent import (Aboitiz vs De Silva, 45 Phil. 883) or by the
incompatibility of the two obligations with each other in every material aspect.

There is novation in this case even in the absence of an express agreement to that effect because the
two obligations are absolutely incompatible with each other.

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)

Substitution of Debtor:

1. Expromision (where the initiative comes from a third person)(Art. 1294)

2. Delegacion (where the initative comes from the debtor, for it is he who delegates another to
pay the debt, and thus, he excuses himself. Here the 3 parties concerned- the old debtor, the
new debtor,and the creditor- must agree).(Art. 1295)

Ex. Jack tells Sky that Tonix will pay Jack’s debt. Sky agrees. It does not necessarily mean that there is
delegacion here. But if Jack tells Sky that Tonix will pay his debt and he asks Sky to release him from his
obligation, to which Sky agrees, delgacion results.
 EXPROMISION DELEGACION
Initiative for change does not emanate from the Debtor (delegante) offers or initiates the change,
debtor, and may even be made without his and the creditor (delegatorio) accepts a third
knowledge. person (delegado) as consenting to the
substitution.
Requisites
(1) Consent of the creditor and the Consent of old debtor, new debtor, and creditor.
new debtor.
(2) Knowledge or consent of the old
debtor is not required.
Effects
(1) Old debtor is released (1) Insolvency of the new debtor revives the
(2) Insolvency of the new debtor does obligation of the old debtor if it was anterior and
not revive the old obligation in case the old public, and known to the old debtor.
debtor did not agree to expromision.

EXPROMISION DELEGACION
(3) If with knowledge and consent of the (2) New debtor can demand reimbursement of
old debtor, the new debtor can demand the entire amount he has paid from the original
reimbursement of the entire amount paid and debtor. He may compel the creditor to subrogate
with subrogation of creditor’s rights. him to all of his rights.

(4) If without knowledge of the old debtor, the

new debtor can demand reimbursement only up
to the extent that the latter has been benefited
without subrogation of creditor’s rights.

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)

 In expromision, the new debtor’s insolvency or non-fulfillment of the obligation will not revive
the action of the creditor against the old debtor whose obligation whose obligation is
extinguished by the assumption of the debt by the new debtor.
 In expromision, the replacement of the old debtor is not made to his own initiative.
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)

General rule: Is that old debtor is not liable to the creditor in case of the insolvency of the new debtor.

Exceptions:
1. The said insolvency was already existing and of public knowledge (although it was not known
to the old debtor) at the time of the delegacion.

2. The insolvency was already existing and known to the debtor (although it was not of public
knowledge) at the time of the delegacion.

The exceptions are intended to prevent fraud on the part of the old debtor.

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)

General rule: The conditions attached to the old obligation are also attached to the new
obligation.
Exceptions: If there is a contrary stipulation

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)

Difference between Conventional Subrogation and Assignment of Credit

CONVENTIONAL SUBROGATION ASSIGNMENT OF CREDIT
Debtor’s consent is necessary. Debtor’s consent is not required.
Extinguishes an obligation and gives rise to a Refers to the same right which passes from one
new one. person to another, without modifying or
extinguishing the obligation.
Defects/vices in the old obligation are cured. Defects/vices in the old obligation are not cured.

 Conventional Subrogation – takes place by agreement of parties

 Legal Subrogation – takes place by operation of law
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)

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)