SECTION 4.

- 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.

CONFUSION OR MERGER OF RIGHTS – is the merging or meeting in one

person of the qualities or rights of creditor and debtor with respect to the
same obligation.

Consequently, the obligation is extinguished, as it is absurd for a person to

enforce or pursue an obligation against himself.

REQUISITES FOR CONFUSION OR MERGER OF RIGHTS:

1. There is merger in the same person of the characters of a principal

creditor and a principal debtor;

2. The merger is definite and complete up to the extent of the

concurrent value or amount.

ILLUSTRATION of MERGER or CONFUSION OF RIGHTS:

1. To pay his P10,000 obligation, Boy issued a check pay to Cash to his
creditor Kris. In turn, Kris used the check to pay her debt to Toni. Toni
then used the same check to pay his debt due to her creditor, Boy.

There is now a resulting merger in the person of Boy, the characters of the
principal debtor and now, the principal creditor.

2. Jamby leased for P20K/mo. a house in Woodridge Subd. from her single
aunt Concha. When aunt Concha died she bequeathed in her Will the house
and lot that Jamby is renting from her. As a result, there is now a merger
in the person of Jamby, the characters of obligor-lessee and obligee-
lessor, or debtor & creditor.

3. Study also case of Yek Tong Lin Fire etc. v. Yusingco, 64 Phil. 1062.

NOTE: WHEN MERGER IS REVOKED; EFFECTS – If the act which

created the merger is revoked for some causes (like rescission,
nullity of will or contract), the merger is also revoked, and the
obligation is revived in the same condition before merger.

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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.

This Article applies to 2 Kinds of Merger:

1. Merger in the person of principal creditor and principal debtor;

This 1st merger extinguishes the guaranty as the principal
obligation is extinguished and the guaranty is merely an accessory
obligation. This type of merger benefits the guarantors.

Illustrate: Dan owes P1M to Cora. This debt is guaranteed by Gorio. Cora
assigned her P1M credit to Ben. Later, Ben assigned this P1M credit to
Dan as payment for the lot he bought from Dan. Here by Merger, the
obligation of Dan is extinguished. This also extinguished or released
Gorio from his obligation as guarantor of Dan’s debt.

2. Merger in the person of guarantor.

In this type of merger, the principal obligation is not extinguished,
because the effectivity of the principal obligation is not dependent
upon the accessory obligation.

Illustrate: Assuming the same facts above, if Ben assigned his credit to
the guarantor Gorio (instead of the debtor Dan), there is merger of the
credit in the person of Gorio, the guarantor. Thus, Gorio is released from
his obligation as guarantor. But the principal obligation of debtor Dan
remains. Now, Gorio, the guarantor becomes the new creditor who can
collect the P1M debt from the principal debtor Dan.

There is NO complete merging or confusion in the same person of the

characters of principal debtor and principal creditor.

Note: Study further the illustrative cases in the books of Paras & Pineda.

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.
 
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CONCEPT OF JOINT OBLIGATION: Joint obligation is a collective
obligation where there is a concurrence of two or more debtors or creditors,
where each debtor is liable only for a proportionate part of the debt, and
each creditor is entitled only to a proportionate part of the credit.

JOINT OBLIGATION IS NOT EXTINGUISHED BY CONFUSION OR

MERGER; EXCEPTION –

o In a Joint obligation where there are several debtors and creditors, if

there occurs a merger between one principal debtor or principal
creditor, this will not extinguish the entire joint obligation.

o Reason: The merger or confusion is with respect only to the share of

the debtor or creditor concerned, in whom the two characters of
principal debtor and principal creditor merged. There is only partial
extinguishment of the joint obligation.

o If the merger takes place in the person of the debtor with regard to his
share in the debt, the creditors can still recover from the other joint
debtors whose part of the debt had not been extinguished by the
merger in one debtor.

ILLUSTRATION:

1. Good friends, Rene & Glory jointly loaned P1M from Mike to start a business.
Later, Mike assigned his whole credit to Glory. As a result, Glory’s share
(P0.5M) in the obligation is extinguished due to the merger of the characters
of debtor and creditor in her person.

Rene on the other hand, as joint debtor, remains liable to his share of P0.5M
in the obligation. But this time, he will pay this to Glory, no longer to Mike.

2. If Mike assigned only part of his credit (P0.5M) to Glory, the debt is not
extinguished entirely - only with respect to Glory’s share.

Rene must still pay his share (P0.5M) in the joint obligation to Mike. But
Glory is now released from paying her share by reason of the merger of
debtor/creditor characters on her person on the concurrent sum of P0.5M.

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 Section 5. – COMPENSATION

Art. 1278. Compensation shall take place when two persons, in their
own right, are creditors and debtors of each other.

CONCEPT; DEFINITION OF COMPENSATION – It 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.

o It is a means by which payment is simplified and assured between

persons who are indebted to each other.

o It is the offsetting of the respective obligations of two persons who stand

as principal creditors and debtors of each other.

o If the value to be offset is equal, then there is total extinguishment of the

reciprocal obligations.

o If the offsetting involves different values, then the extinguishment is only

partial or up to the concurrent amount.

“Concurrent” - commensurate; matching; correspondent; simultaneous

ILLUSTRATE:

1. Full or Total Compensation or Offsetting:

Ana bought jewelry on installment worth P10,000 from Bea. Later,

Bea asked for a P15,000 emergency loan from Ana with a promise to
return the money immediately. But Bea was able to pay back only
P5,000 and failed to pay Ana the balance of P10,000. Ana and Bea
are now mutual debtors and creditors of each other.

They agreed that the unpaid balance of Bea for P10,000 will be offset
or compensated from Ana’s due debt to Bea. Here, there is total
compensation and the obligation of both parties are extinguished.

2. Partial Compensation or Offsetting:

If Bea paid Ana only P12,000, and she failed to pay Ana the balance
of P3,000, then, mutual compensation is only up to the sum of
P3,000.

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 This means that Ana who owed Bea P10,000, must still pay Bea
P7,000, after compensation or offsetting of the P3,000 unpaid
balance of Bea.

DIFFERENTIATE COMPENSATION FROM PAYMENT, MERGER,

COUNTERCLAIM:

1. COMPENSATION – there may be partial or total extinguishment of

obligation; it needs no simultaneous delivery as compensation takes
place by operation of law, without need of transfer of money or property
from one party to the other.

 PAYMENT – performance must be complete unless waived by

creditor; involves delivery or action.

2. COMPENSATION – there are at least 2 persons who stand as mutual

debtors and creditors of each other; always involves 2 obligations.

 MERGER – there is only one person in whom the characters of

creditor and debtor are merged; involves only one obligation.

3. COMPENSATION – takes place by operation of law.

 COUNTERCLAIM – must be pleaded as part of the Answer to the

complaint to be effectual.

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;

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 (5) That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to
the debtor.

This article refers to REQUISITES OF LEGAL COMPENSATION.

DISCUSSION: ARTICLE 1279 -

(1) That each one of the obligors be bound principally, and that he
be at the same time a principal creditor of the other;

ILLUSTRATE:

A.) Eve owes Adam P100,000 (as unpaid balance for the car she bought
from him). Later, Adam borrowed P50,000 from Eve. By virtue of
COMPENSATION, the debt of Eve to Adam is extinguished up to the
sum of P50,000, as each of them are principal debtors and creditors
of each other, or they are at the same time, principal creditor of the
other.

B.) Eve owes Adam P100,000. On the other hand, Adam owes Peter
P150,000. Peter happens to be the guarantor of Eve on her debt to
Adam.

 If Eve is unable to pay Adam, Peter as guarantor of Eve, will in effect

become a debtor to Adam for P100,000 on due date if Eve cannot pay
her debt. Can Adam now claim compensation (up to P100,000) for his
debt of P150,000 to Peter the guarantor, using the debt of Eve?

 Answer: NO.

 WHY? A guaranty is only subsidiary. It is an accessory to the principal

obligation of the debtor. Peter’s obligation to the P100,000 as guarantor
of Eve is subsidiary. It is not his principal obligation, as it is by Eve. Thus,
as far as the P100,000 debt is concerned, there can be no compensation
between Adam and Peter on this obligation. Here, Peter is not a
principal debtor of Adam, nor is Adam in this P100,000 debt, a principal
creditor of Peter. (see RULE in Art. 1279, par. 1)

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(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;

ILLUSTRATE:

Gretchen owes Kris 10 kilos of dried lapu-lapu fish. Kris in turn owes
Gretchen 5 kilos of dried galunggong fish and 5 kilos of rice. There
can be no compensation here. While the things are consumables,
they are not of the same kind, and not of the same quality.

NOTE:
1.) Consumable may also mean Fungible, or things which can be
substituted for each other. What is necessary in the latter is that
the specie of the things is determined (Example: x no. of cows,
sheep, orchids)

2.) If the obligations refer to determinate or specific things, there can

be no compensation.

(3) That the two debts be due ;

The debts of both principal debtors/creditors must be both mature,

that is, their period of performance has already arrived. Otherwise,
compensation will not operate by law. (Perez v. CA, 127 SCRA 636)

EXCEPTION: Voluntary Compensation - Art. 1282: “the parties may

agree upon the compensation of debts which are not yet due.”

(4) That they be liquidated and demandable ;

A debt is liquidated if its amount or value is clearly fixed, or may be

determined by simple mathematical computation.

A debt must also be demandable which means: (a) the debt is not yet
barred my prescription; (b) not illegal or invalid; (c) the period has
arrived

(5) That over neither of them there be any retention or controversy,

commenced by third persons and communicated in due time to
the debtor.

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 o A debt or thing cannot be subject of compensation if the same has
been garnished or attached by a third person, and placed in the
custody of the court (custodia legis). The debtor must be timely
notified.

o Consequently, the debt or thing cannot be disposed of without court

approval. Compensation cannot operate, as a third party is now
involved whose claim has to be resolved by the court.

o If the case of the 3rd party is dismissed and the garnishment or

attachment is released, the principal debtors/creditors are now free to
set up compensation if warranted. But if the third party wins against
his case to one of the debtors, then, there will be no compensation.

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)

REASON: A guarantor’s liability is subsidiary. It is an accessory to the

principal obligation of the debtor. If the principal debtor has a credit against
creditor, that may be subject of compensation, this may extinguish the
guaranteed debt, totally or partially.

Thus, if the creditor demands payment from the guarantor, the guarantor is
allowed to set up compensation against the creditor for:

(a) What the creditor owes the principal debtor whom the guarantor is
guaranteeing;

 Reason: If the principal debtor has a credit against the creditor, the
creditor shall not collect first from the guaranty. As long as the principal
debtor is capable of paying the obligation; his properties must first be
exhausted.

(b) What the creditor owes the guarantor himself.

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

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Q. WHAT ARE THE CLASSES OF COMPENSATION?

1. TOTAL – when debts are of the same amounts, compensation is

total.

2. PARTIAL – when debts are not of the same amount, compensation is

partial, for its operative only up to concurrent amount. The balance
remains to be fulfilled.

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

o This Article is about VOLUNTARY COMPENSATION of mutual debts

not yet due by agreement of parties. But to be valid, the Parties must
have capacity to dispose of the credits subject of their compensation.

o This article is the EXCEPTION to the Gen. Rule that - for compensation
to be effective, both debts must be due.

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.

This Article contemplates a Judicial Compensation whereby plaintiff files a

collection suit against defendant who is able to prove the claim of damages
in his Answer. As a result, the court will apply compensation between
plaintiff’s recovery of sum as against defendant’s claim for damages.

See: Yap Unki v. Chua Jamco, 14 Phil. 602.

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.

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COMPENSATION IN RESCISSIBLE OR VOIDABLE DEBTS - Before
rescissible or voidable debts are judicially rescinded or annulled, they are
valid. Hence, compensation may take place between both debts.

LEGAL EFFECTS IN CASE OF SUBSEQUENT JUDGMENT of

RESCISSION OR ANNULMENT:

1.) Once the debt is rescinded or annulled, the decree of rescission of

annulment is retroactive;

2.) Consequently, the compensation previously made is considered

cancelled;

3.) In such case, there will be restitution of what each party had
received in the compensation, before the decree of rescission.

4.) However, if the period for the rescission or annulment of debts

had prescribed, the compensation made will remain and will not
be disturbed anymore.

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.

This Article refers to ASSIGNMENT OF DEBTS BY CREDITOR AFTER OR

BEFORE COMPENSATION; RULES -

 GEN. RULE ON COMPENSATION: If all the requisites of compensation

are present, the obligation is extinguished to their concurrent

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 amount, and this takes effect automatically ipso jure by operation of law.
(Arts. 1279 & 1290)

 After this, any assignment of rights to a third person is without any effect,
as there is nothing more to assign, since the obligation has been
extinguished by compensation.

 EXCEPTIONS; ASSIGNMENT BEFORE OR AFTER

COMPENSATION; RULES:

1.) Assignment with Consent of Debtor - 1st par., Art. 1285

o Debtor loses any defense of compensation against the assignee

(third person) which debtor may have against the assignor.
o Exception: If at the time debtor gives his consent, he also
reserves his right to the rights of compensation.

Legal Effect: (a) Debtor can set up the defense of compensation

against the assignee, and; (b) debtor is released from his
obligation.

2.) Assignment with Knowledge, but No Consent of Debtor – 2nd

par., Art. 1285
o Here, creditor informs debtor that he is assigning his rights to a
third person, but debtor said NO.

o Legal Effect:

(a) If assignee enforces creditor’s assigned right which has now

matured, the debtor retains his right to invoke against the
assignee, the compensation of his debt which fell due before
the assignment;

(b) But if the assigned credit matures earlier than that of debtor,
as debtor’s credit matured only after the assignment, debtor
cannot set up compensation, and the assignee in this case can
immediately enforce against the debtor.

3.) Assignment Without knowledge of Debtor. – 3rd par., Art. 1285

o If creditor assigned his rights to a third person without knowledge

of debtor, the debtor may still set up compensation of all credits of

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 creditor before and/or after assignment, up to the time the debtor
learns of the assignment made by the creditor.

o Legal Effect: (a.) The compensation can be set up against the

assignee;
(b.) Third-person Assignee may go after the assignor-
creditor in turn.

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)

This Article refers to LEGAL COMPENSATION, but not to voluntary

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.

This Article provides for DEBTS/OBLIGATIONS NOT SUSCEPTIBLE OF

COMPENSATION:

1. Debts arising from contracts of deposit;

DEPOSIT – a contract whereby the depositary receives a personal

property belonging to the depositor for safekeeping and to return the
same.

2. Debts arising from the obligations of a depositary;

3. Debts arising from obligations of a bailee in commodatum;

COMMODATUM – is a gratuitous contract whereby the bailor delivers

to the bailee a non-consumable personal property so that the latter
may use it for a certain time and return it.
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 Nota Bene:
 Reason for the prohibition is based on justice, morality and to
prevent breach trust and confidence between the depositor and
depositary, or bet. the borrower (bailee) and the bailor in
commodatum.

 Only depositary and borrower (in commodatum) cannot set up

compensation.

 The depositor can set up compensation with his deposit against a

claim of depositary. Lender (bailor) can set up his loan against a
credit of the borrower.

4. Debts or claims for support due by gratuitous title;

 Last par. of Art. 1287 - “x x x without prejudice to the provisions of

paragraph 2 of Article 301 - had been repealed by Art. 254 of the
Family Code.

 Future support is no longer subject to compensation.

 This is complemented by Art. 2035, par. 4 which provides that

future support cannot be compensated or compromised.

 Support does not only refer to legal support, but also other rights of
debtor to be entitled support for subsistence, pension and
gratutities, annuities.

Others:
5. Debts consisting of a civil liability arising from a penal offense
(Art. 1288)

6. Debts due to the government like taxes, fees and duties and
similar others.

Reason: these obligations are vested with public interest

Exception: if debt in favour of government arises from contractual
obligation, compensation may take place; however, mutual
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 obligations must pertain to the same department or agency of the
government.

Art. 1288. Neither shall there be compensation if one of the debts

consists in civil liability arising from a penal offense.

DEBTS ARISING FROM CRIME IS NOT SUSCEPTIBLE OF

COMPENSATION –

 The offender cannot escape civil liability by setting up compensation as

against the offended party.

 Compensation is improper as the satisfaction of the obligation arising

from crime (civil liability) is imperative.

 But the offended party, may claim compensation for his debt to the
offender.

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.

APPLICATION OF PAYMENTS MAY APPLY TO ORDER OF

COMPENSATION –

 If debtor has several debts to a creditor, or vice versa, Articles 1252 –

1254 in Application of Payments shall apply.

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.

WHEN COMPENSATION TAKE EFFECT -

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 1.) LEGAL COMPENSATION – the moment that requisites of Arts. 1278
& 1279 co-exist, compensation takes place by operation of law, even
if the parties are not aware thereof.

Debtor must however allege and prove the grounds therefor. Once
proved its effects retroact to the moment when the requisites
provided by law concurred.

2.) VOLUNTARY or CONVENTIONAL COMPENSATION – upon

agreement of the parties.

3.) JUDICIAL COMPENSATION - from the time the judgment becomes

final and executory.

Q. WHAT ARE THE EFFECTS OF COMPENSATION ?

A. They are as follows:
1.) Both debts are extinguished to the concurrent amount;
2.) Interests stops accruing on the entire or part extinguished obligation.
3.) The period of prescription stops with respect to the entire or part
extinguished obligation.
4.) All accessory obligations of the principal obligation which has been
extinguished, are also extinguished.

Q. CAN COMPENSATION BE RENOUNCED?

A. YES. Compensation may be renounced during or after the obligation is
contracted. A debtor may unilaterally renounce compensation.

It may be renounced expressly or impliedly. Examples of implied

renunciation: (1) failing to claim compensation in litigation; (2)
consenting to assignment of credit under Art. 1285; (3) paying the debt
despite knowing that it has been cancelled by compensation.

EXCEPTION: Renunciation cannot be made to the prejudice of third

persons.

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Q. IN WHAT CASES WHEN COMPENSATION MAY NOT TAKE PLACE?
A. Even if all the requisites for a compensation concur, compensation is not
allowed in the following:

(1) When there is a renunciation of the effects of compensation by a

party;

(2) When the law prohibits compensation as in Art. 1287 (debts arising
from deposit and bail, family support) , and Art. 1288 (debts arising
from penal offense).

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