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Modes of extinguishment

BSBA (Central Luzon State University)

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CHAPTER 4 1. Integrity of prestation – A debt to

EXTINGUISHMENT OF OBLIGATIONS deliver a thing or to render service is
GENERAL PROVISIONS not understood to have been paid
unless the thing or service has been
Causes of Extinguishment of Obligations completely delivered or rendered.
1. By payment or performance 2. Identity of the prestation – The very
2. By the loss of the thing due prestation due must be delivered or
3. By the condonation or remission of the performed.
debt (Forgive the debt)
4. By the confusion or merger of the rights
of creditor and debtor Recovery allowed in case of substantial
5. By Compensation performance in good faith
6. By novation (Substitution of a new Article 1234 is the first exception in Article
contract in place of an old one) 1233. Code Commission said that Article 1234 is
adopted from American Law. In case of partial
Other causes provided by Article 1231: performance, the creditor is benefited. So, the
1. Annulment debtor should be allowed to recover as if there
2. Rescission had been a strict and complete fulfillment.
3. Fulfillment of a Resolutory Condition
4. Prescription
Requisites for the Application of Article 1234
Other causes not provided by Article 1231: (Obligation partially fulfilled)
1. Death of a party in case of an obligation 1. There must be substantial performance
requiring personal service. 2. The debtor must be in good faith
2. Mutual desistance or withdrawal.
3. Arrival of a reolutory period *There is Substantial Performance when the
4. Compromise important or essential part of the contract has
5. Impossibility of Fulfillment been performed and only a small or minor part
6. Happening of a fortuitous event. has not been carried out.

Recovery allowed when incomplete or

SECTION 1 – Payment or Performance Irregular performance is waived
Article 1235 is other exception to Article 1233.
Meaning of Payment 1. If the payment is incomplete or
Payment – In ordinary parlance, payment refers irregular, the creditor may properly
to delivery or money. reject it.
- May consist not only in the delivery of 2. In case of acceptance, the law considers
money but also giving of a thing, doing of an that he waives his right. The whole
act, or not doing of an act. obligation is extinguished.

When debt is considered paid Requisites for the application of Article 1235
Debt – may refer to an obligation to deliver 1. The creditor knows that the
money, to deliver a thing, to do an act, or not to performance is incomplete.
do an act. 2. He accepts the performance without
expressing any protest.
A Debt is considered paid in:

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and the right of the

Persons from whom the creditor must accept creditor could have
payment exercised
1. The debtor pertaining to the
2. Any person who has interest in the credit.
obligation (Parent or Guardian)
3. A third person who has no interest in
the obligation when there is stipulation Payment by a third person who does not
that he can make payment. intend to be reimbursed
If the paying third person does not intend to be
reimbursed, the payment is deemed a donation
Creditor may refuse payment by a third person which requires the debtor’s consent to be valid.
Under the Old Civil Code, the creditor cannot
refuse payment by a third person but the
commission believes the creditor should have a Meaning of “Free Disposal of the Thing Due”
right to insist on the liability of the debtor. and “Capacity to Alienate”
1. Free Disposal of the Thing Due – means
that the thing to be delivered must not
Effect of payment by a third person be subject to any claim or lien or
1. If made without the knowledge or encumbence of a third person.
against the will of the debtor – The 2. Capacity to alienate – means that the
payer can recover from the debtor only third person is not incapacitated to
insofar as the payment has been enter into contracts.
beneficial to the debtor.
2. I made with the knowledge of the
debtor – The payer shall have the rights
of reimbursement and subrogation that
is to recover what he has paid. Free Disposal of the Thing Due and Capacity to
Alienate Required
Payment by one who does not have the free
Right of third person to subrogation disposition of the thing due and capacity to
Whoever pays in behalf of the debtor in entitled alienate is not valid. This means that the thing
to subrogation if they payment is with the paid can be recovered.
consent of the debtor. If the payment is made
without the consent of the debtor, the payer
cannot compel the creditor to subrogate him. Person to whom the payment shall be made
Payment shall be made to:
1. The creditor
Subrogation and Reimbursement Distinguished 2. His successor in interest
Subrogation Reimbursement 3. Any person authorized to receive it
The person who The third person is
pays for the debtor entitled by the reason
is put into the of payment without Meaning of “Any person authorized to receive
shoes of the the right to the it”
creditor. The payer guarantees and It means not only a person authorized to
acquires the rights securities of the receive by the creditor, but also a person
to be reimbursed original obligation.

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authorized by the law to receive the payment, the debt until the right of the plaintiff, the
such as guardian. creditor in the main litigation is resolved.

Effect of the Payment to an Incapacitated Very Prestation Due must be Complied with
person 1. The first paragraph refers to real
Payment to a person incapacitated to obligation to deliver a specific thing. A
administer his propert is not valid unless such thing different from that due cannot be
incapacitated person has kept the thing paid or offered or demanded against the will of
delivered. the creditor or debtor.
2. The second paragraph refers to
Personal Obligations. The act to be
Effect of payment of a Third Person performed or the act prohibited cannot
Payment to a third person or wrong party is not be substituted against the creditor’s
valid except insofar as it has redounded to the will.
benefit of the creditor.

When benefit to Creditor need not be proved When Prestation may be Substituted
by the Debtor Substitution can be made if the creditor
The debtor is relieved from proving benefit to consents. In facultative obligations, the debtor
the creditor incase of: is given the right to render another prestation in
1. Subrogation of the payer in the substitution.
creditor’s rights.
2. Ratification by the creditor (Consent
Given) Special Forms of Payments
3. Estoppel on the part of the Creditor 1. Dation in Payment
2. Application of payments
Estoppel – an admission or representation is 3. Payment by cession
rendered conclusive upon the third person 4. Tender of payment and consignation
making it and cannot be denied or disproved as
against the person relying thereon.
Meaning of Dation in Payment
Dation in payment – the conveyance of
Payment to Third person in Possession of the ownership of a thing as an accepted equivalent
Credit of performance.
It must be observed that the possession
referred is possession of the credit itself and not
merely of the document or instrument Governing Law
evidencing the credit The law of sales governs because dation in
payment may be considered a specie of sale in
which the amount of money debt becomes the
When payment to Creditor is not Valid price of the thing alienated.
In an action against the debtor who is a creditor
of another, the latter, during the pendency of
the case, may be ordered by the court to retain Rule of medium quality

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Article 1246 is a principle of equity in that it

supplies justice in case where there is lack of
precise declaration in the obligation.
If the obligation consists in the delivery of a Meaning of Legal Tender
specific thing, very thing due must be delivered. Legal Tender – is that currency which is offered
If the obligation is to deliver a generic thing, the by the debtor in the right amount, the creditor
purpose of the obligation and other must accept in payment of a debt in money.
circumstances shall be taken into consideration.

Legal Tender in the Philippines

Debtor Pays for Extrajudicial Expenses Debts in money shall be paid in the currency
The extrajudicial expenses of payment are for stipulated. If it is not possible to deliver such
the account of the debtor. If the parties have currency or in the absence of any stipulation to
made a stipulation as to who will bear the make payment in foreign currency, then the
expenses, then the stipulation will be followed. payment shall be made in the currency which is
legal tender in the Philippines.

Losing party Generally pays Judicial Costs

Judicial Costs – statutory amounts allowed to a Payment by means of Instruments of Credits
party to an action for his expenses incurred in 1. Right of creditor to refuse or accept –
the action. Promissory notes, checks, bills of
exchange and other commercial
documents are not legal tender and,
Performance of Obligation should be complete therefore, the creditor cannot be
In order that payment may extinguish an compelled to accept them.
obligation, it is necessary that there, be a. The creditor, however, if he
complete performance of the prestation. The chooses, may accept them, without
creditor may accept but he cannot be the acceptance producing the effect
compelled to accept partial performance. of payment. In the meantime, the
demandability of the original
The debtor has the duty to comply with the obligation is suspended.
whole obligation but he cannot be required to b. The creditor must cash the
make partial payments. instrument, and it is only when it is
dishonored that he can bring an
action for non-payment of the debt.
When Partial Payments are Allowed 2. Effect on obligation – Payment by
1. When there is an express stipulation to means of mercantile documents does
that effect. not extinguish the obligation:
2. When the debt is in part liquidated and a. Until they have been cashed.
in part unliquidated. b. Unless they have been impaired
3. When the different prestations in which through the fault of the creditor.
the obligation consists are subject to
different terms or conditions when
affect some of them. Meaning of Inflation and Deflation
1. Inflation – sharp sudden increase of
money or credit or both without a
corresponding increase in business

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transactions. Inflation causes a drop in

the value of money, resulting in the rise Requisites of Application of Payments
of the general price level. 1. There must be one debtor and one
2. Deflation – the reduction in the volume creditor.
and circulation of the availability money 2. There must be two or more debts
or credit, resulting in a decline of the 3. The debts must be of the same kind.
general price level. 4. The debts to which payment made by
the debtor has been applied must be
due.
Basis of Payment in case of Extraordinary 5. The payment made must not be
Inflation or Deflation sufficient to cover all debts.
Under the Article 1250, the purchasing value of
the currency at the time of the establishment of
the obligation shall be the basis of payment, in Application as to Debts not yet Due
case of increase or decrease in the purchasing The application of payments as to debts not yet
power of the currency which the parties could due cannot be made unless:
not have reasonably foreseen. 1. There is a stipulation that the debtor
may so apply.
2. It is made by the debtor or creditor, as
Place where Obligation shall be Paid the case may be, for whose benefit the
1. If there is stipulation, the payment shall period has been constituted.
be paid in the place designated.
2. If there is a stipulation, and the thing to
be delivered is specific, the payment Rules on Application of Payments
shall be made at the place where the As to which debt is paid, the rules are as
thing was, at the perfection of the follows:
contract. 1. The debtor has the first choice; he must
3. If there is no stipulation and the thing indicate at the time of making payment,
to be delivered is generic, the place of and not afterwards, which particular
payment shall be domicile of the debt is being paid.
debtor. 2. The right to make the application once
exercised is irrevocable unless the
creditor consents to the change.
SUBSECTION 1 – Application of Payments 3. If the debtor does not apply payment,
the creditor may make the designation
Meaning of Application of Payments by specifying in the receipt which debt
Application of Payments – the designation of is being paid.
the debt to which should be applied the 4. If the creditor has not also made the
payment made by a debtor who has various application, or if the application is not
debts of the same kind in favor of one and the valid, the debt, which is most onerous
same creditor. to the debtor among those, shall be
deemed to have been satisfied.
5. If the debts due are of the same nature
and burden, the payment shall be
applied to all of them proportionately.

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Interest Earned Paid Ahead of Principal Suppose the debts are subject to different
The rule laid down in the article is mandatory. burdens that it cannot be definitely determined
Hence, the debtor cannot choose to credit his which debt is more onerous to the debtor, the
payment to the principal before the interest is payment should be applied to all of them
paid. proportionately.

Application of Payment to the Most Onerous SUBSECTION 2 – Payment by Cession

Debt
In case no application of payment has been Meaning of Payment by Cession
made by the debtor and the creditor, then the Payment by Cession is another special form of
payment shall be applied to the most onerous payment where it is the assignment or
debt, and if the debts are of the same nature abandonment of all the properties of the debtor
and burden, to all of them proportionately. for the benefit of his creditors in order that the
latter may sell the same and apply the proceeds
thereof to the satisfaction of their credits.
When a debt more onerous than another
A debt is more onerous than another when it is
more burdensome to the debtor. No fixed rule Requisites of Payment by Cession
can be laid down in determining which debt is 1. There must be two or more creditors
more onerous to the debtor since the condition 2. The debtor must be partially insolvent.
of being more burdensome is a matter 3. The assignment must involve all the
dependent upon circumstances. properties of the debtor.
4. The cession must be accepted by the
The Supreme Court gave some rules which can creditors.
be followed to determine whether one debt is
more burdensome than another:
1. An interest bearing debt is more Effect of Payment by Cession
onerous than a non interest bearing Unless there are stipulation, the assignment
debt even if the non interest bearing does not make the creditors the owners of the
debt is an older one. property of the debtor and the debtor is
2. A debt as a sole debtor is more onerous released from his obligation only up to the net
than a solidary debtor. proceeds of the sale of the property assigned.
3. Debts secured by a mortgage or by
pledge are more onerous than
unsecured debts. Dation in Payment and Cession Distinguished.
4. Of two interest bearing notes, the one Dation Cession
with a higher rate is more onerous. There is usually There are several
5. An obligation with a penalty clause is one creditor creditors
more burdensome than one without Does not The debtor is insolvent
penalty clause. presuppose the in the time of
insolvency of the assignment
debtor
Does not involve all Extends to all the
the property of the property of the debtor
Where debts subject to Different Burdens
debtor subject to execution
The creditor The creditors acquire

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becomes the the right to sell the

owner of the thing thing and apply the
given by the debtor proceeds to their Prior Notice to Persons Interested Required
credits *In the absence of notice to the persons
proportionately. interested in the fulfillment of the obligation,
the consignation, as payment shall be void.

SUBSECTION 3 – Tender of Payment and

Consignation Consignation must comply with Provisions on
Payment
Meaning of “Tender of Payment” and Consignation, to amount to a valid payment,
“Consignation” must also comply with the previous provisions,
1. Tender of Payment – act, on the part of which regulate payment.
the debtor, of offering to the creditor Article 1233 – A debt should not be
the thing or amount due. understood as paid unless completely delivered
2. Consignation – act of depositing the or rendered.
thing or amount due with the proper Article 1239 – In obligations to give,
court when the creditor does not desire payment made by one who does not have the
or cannot receive it, after complying free disposal of the thing due and capacity to
with the formalities required by law. alienate it shall not be valid.
Article 1244 – The debtor of a thing
cannot force the creditor to receive a different
Requisites of a Valid Consignation one.
1. Existence of a valid debt which is due Article 1246 – When the obligation
2. Tender of payment by the debtor and consists in the delivery of a generic thing whose
refusal without justifiable reason by the quality have not been stated, the creditor
creditor to accept it. cannot demand a superior or inferior quality.
3. Previous notice of consignation to Article 1248 – Unless there is
person interested in the fulfillment of stipulation, the creditor cannot be compelled
the obligation. partially to receive the prestations in which the
4. Consignation of the thing or sum due obligation consists.
5. Subsequent notice of consignation Article 1249 – The payment of debts in
made to the interest parties. money shall be made in the currency stipulated.
Article 1253 – If the debt produces
interest, the payment of the principal shall not
be deemed to be made until interests are
covered

Requisites for Valid Tender of Payment Consignation must be with Proper Judicial
1. Tender of payment must comply with Authority
the rules on payment or with the terms *Consignation, by depositing, the thing or sum
required by the contract in making such due with the proper judicial authority, is
tender. necessary to effect payment.
2. It must be conditional and for the
whole amount due and in legal tender.
3. It must be actually made. Creditors bear Expenses of Consignation

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*The consignation is made necessary because of

the fault or unjust refusal of the creditor to
accept payment. That being the case, it is just
that the expenses should be charged against
him.

When Consignation deemed properly made

1. Acceptance of the thing or sum
deposited
2. Declared by the court
3. Obligation cancelled by the court.

Withdrawal by Debtor of Thing deposited or

Sum Deposited
The debtor, may withdraw the thing or sum
deposited:
1. Before the acceptance of Consignation
2. Before a Judicial Declaration that the
consignation has been properly made.

Effect of Withdrawal with Authority of Creditor

*The creditor shall lose every preference which
he may have over the thing, and the co-debtors,
guarantors, and sureties shall be released from
the obligation.

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SECTION 2 – Loss of the Thing Due The court is given the discretion to decide
whether the partial loss is equivalent to a
When a Thing is Considered Lost complete or total loss.
*It is understood that a thing is lost when it
perishes, or goes out of commerce or
disappears in such a way that it cannot be Presumption of Fault in Case of Loss of Thing in
recovered. Possession of the Debtor
Loss of a determinate thing is equivalent to *When the thing is lost in the possession of the
impossibility of performance in obligation. debtor, it is presumed that the loss was due to
his fault. In case it is proven that the loss was
not due to his fault, he may still be liable in case
When Loss of Thing will extinguish an he is guilty of delay.
Obligation to Give
Requisites in order for an obligation be
extinguished by the loss of the thing: When Presumption not Applicable
1. The obligation to deliver is a specific *In case of calamities, the presumption of fault
thing. to the debtor does not apply.
2. The loss of the thing occurs without the
fault of the debtor.
3. The debtor is not guilty of delay. Effect of Impossibility of Performance
*If the obligation becomes impossible without
the debtors, fault, the obligation becomes
When Loss of Thing will not extinguish Liability legally or physically impossible which leads to
Cases when the loss of the specific thing in the extinction of the obligation.
absence of fault and delay will not exempt from The impossibility must take place after the
liability. constitution of the obligation. If the obligation is
1. When the law so provides impossible from the very beginning, the
2. When the stipulation so provides obligation is void
3. When the nature of the obligation
requires the assumption of risk.
4. When the obligation to deliver a specific Kinds of Impossibility
thing arises from a crime. 1. Physical Impossibility – The obligor dies
or becomes incapacitated to perform
the obligation.\
Effect of Loss of a Generic Thing 2. Legal Impossibility – When it is
*The debtor can still be compelled to deliver a rendered impossible by the provision of
thing of the same kind. However, the creditor law, although it may be possible of
cannot demand for a superior or inferior quality performance.
of a thing.
Effect of Difficulty of Performance
*When the performance of the service has
Effect of Partial Loss of a Specific Thing become so difficult beyond the contemplation
*There is partial loss when only a portion of the of both parties, the court is authorized to
thing is lost or destroyed or when it suffers from release the obligor in whole or in part.
depreciation or deterioration. Partial loss is the
equivalent of difficulty of performance.

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Effect of Fortuitous Event where Obligation

proceeds from Criminal Offense
*When the debt of a certain thing arises from
Criminal Offense, the debtor is not released
whatever the reason is for the loss of the thing.

The obligation exists except when the creditor

refuses to accept the thing without justification,
after it has been offered to him. Consignation is
not necessary.

Right of Creditor to Proceed Against Third

Persons
*The creditor is given the right to proceed
against the third person responsible for the loss.
The rights of action are transferred to the
creditor from the moment obligation is
extinguished.

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SECTION 3 – Condonation or Remission of Debt

Presumption in Case of Voluntary Delivery of
Meaning of Condonation or Remission Document of Indebtedness by Creditor:
Condonation or Remission - is the gratuitous 1. Presumption of Implied Remission – If
abandonment by the creditor of his right the debt is not yet paid, the creditor
against the debtor. would need the document to enforce
- A form of payment. If the creditor voluntarily
donation delivers the document to the debtor, it
means he is renouncing his right.
2. Contrary Evidence – The presumption is
Requisites of Condonation or Remission prima facie (accepted as correct until
1. It must be gratuitous proved otherwise) or rebuttable by
2. It must be accepted by the obligor contrary evidence.
3. The parties must have the capacity. 3. Extent of Remission - If obligation is
4. It must be inofficious joint, presumption of remission
5. If made expressly, it must comply to the (cancellation of debt) pertains only to
forms of donations. the share of the debtor who is in
possession of the document (receipt). If
the obligation is solidary, to the whole
Kinds of Remission obligation.
1. As to its extent: 4. Presumption applicable – Article 1271
a. Complete – covers the entire speaks of private documents. The legal
obligation presumption of remission does not
b. Partial – does not cover the entire apply on public documents because it is
obligation easy to obtain a copy of the same.
2. As to its form:
a. Express – Made either verbally or in
writing Payment, not Remission of Debt
b. Implied – It can only be inferred The remission becomes null and void upon the
from conduct. proof that it is inofficious. The debtor may
3. As to its date of effectivity prove that the delivery of the document was
a. Inter Vivos – When it will take effect really made in virtue of payment of the debt not
during the lifetime of the donor. of remission.
b. Mortis Causa – When it will become
effective upon death of the donor.

Effect of Inofficious Remission Presumption in case Document found in

*No one can give donations more than that Possession of the Debtor
which he can give, otherwise it is inofficious and Ordinarily, the document evidencing the debt is
shall be reduced by the court accordingly. in the possession of the creditor. It means that
his credit is as yet uncollected, unless the
Legetime – part of the testator’s property which debtor proves satisfactorily that he has already
he cannot dispose because the law has reserved paid the claim.
it for certain heirs. If the document is later found in the hands of
Compulsory Heirs – Children the debtor and it is unknown he the document
came into his possession, the presumption is

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tha it is voluntarily delivered by the creditor 1. The law treats confusion or merger as a
unless it is proved by the creditor. mode of extinguishing obligations
because if a debtor is his own creditor,
obligation becomes absurd since a
Effect of Renunciation of the Principal Debt of person cannot claim payment from
the Accessory Obligation himself.
The provision follows the rule that the 2. When there is confusion of rights, the
accessory follows the principal. Renouncing the purposes for which the obligation may
principal obligation renounces the accessory have been created are deemed realized.
obligation as well. Renouncing the accessory
obligation does not terminate the principal
obligation. Requisites for Confusion
1. It must take place between the principal
debt and creditor
Presumption in case Thing Pledged found in 2. It must be complete
the Possession of Debtor
Pledge – is a contract by virtue of which the
debtor delivers to the creditor or to a third Effect of Merger in the person of Principal
person a movable or instrument evidencing Debtor or Creditor
incorporeal rights for the purpose of securing Merger in the person of the principal debtor or
the fulfillment of a principal obligation with the creditor extinguishes the obligation. Hence the
understanding that when the obligation is accessory obligation is also extinguished in
fulfilled the thing delivered shall be returned accordance with the principle that the
with its fruits and accessions. accessory follows the principal.

It is necessary that the thing pledged be placed

in the possession of the creditor or of a third Effect of Merger in the Person of Guarantor
person by common agreement. If the thing The extinguishment of the accessory obligation
pledged is later found in the hands of the does not carry with it that of the principal
debtor, or the third person, only the accessory obligation. Merger which takes place in the
obligation is remitted, not the oblgation itself. person of the guarantor leaves the principal in
force.
(If the thing pledged it later found in the hands
of the debtor, it is presumed that the creditor
agrees to the obligation without the pledge. The
creditor may prove that he returned the thing
pledged and request to deliver it back.) Confusion in a Joint Obligation
In a joint obligation, each debtor has his own
SECTION 4 – Confusion or Merger of Rights creditor to whom he is liable and confusion
taking place in the person of any debtor does
Meaning of Confusion or Merger not affect the obligation of others.
Confusion or Merger – is the meeting in one
person of the qualities of creditor and debtor
with respect to the same obligation. Confusion in Solidary Obligation
Merger in one of the solidary debtors shall
extinguish the entire obligation.
Reason or Basis for Confusion

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SECTION 5 – Compensation c. Judicial – when it takes place by

order from a court in a litigation.
Meaning of Compensation d. Facultative – when it can be set up
Compensation – extinguishment to the only by one of the parties.
concurrent amount of the debts of two persons
who, in their own right, are debtors and
creditors of each other. Requisites of a Legal Compensation
1. The parties are principal creditors and
principal debtors of each other.
Object of Compensation 2. Both debts consist in a sum of money,
The object of compensation is the prevention of or of consumable things of the same
unnecessary litigations (lawsuits) and payments. kind and quantity.
3. The two debts are due and
Simplified Payment – other term for demandable.
Compensation because it provides a more 4. The two debts are liquidated.
convenient and less expensive effectuation of 5. No retention or controversy
payments between two persons who are commenced by a third person.
reciprocally creditors and debtors.

Compensation benefits Guarantor

Compensation and Confusion Distinguished Although the guarantor is only subsidiarily, not
Confusion Compensation principally bound, he is given the right to set up
There is only one There are two persons compensation.
person who is a involved where each
creditor and debtor is a debtor and a
himself. creditor of the other. Total and Partial Compensations
There is only one There are two Total compensation results when the two debts
obligation obligations. are of the same amount. If they are of different
There is There is indirect amounts, compensation if total as regards to
impossibility of payment. who has a smaller debt and compensation is
payment. partial only with respect to who has the larger
debt.

Kinds of Compensation
1. By its effect or extent: Voluntary Compensation
a. Total – when both obligations are of Voluntary or Conventional Compensation
the same amount and entirely includes any compensation which takes place by
extinguished. agreement of the parties even if all the
b. Partial – when the two obligations requisites for legal compensation is not present.
are of different amounts and a
balance remains. Judicial Compensation
2. By its cause or origin: Compensation may also take place when so
a. Legal – when it takes place by declared by a final judgment of a court in a suit.
operation of law even without the A party may set off his claim for damages
knowledge of parties. against his obligation to the other party by
b. Voluntary – when it takes place by proving his right to said damages.
agreement of the parties.

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Exchange Rate – The price of one currency

Compensation of Rescissible or Voidable Debts expressed or quoted in relation to another
(Valid but may be ended by one of the parties) currency.
Rescissible and Voidable Obligations are valid
until they are judicially rescinded or avoided.
Prior to rescission or annulment, the debts may Instances when Legal Compensation is not
be compensated against each other. Allowed by Law
1. Where one of the debts arises from a
Depositum
Where the Compensation has taken place 2. Where one of the debts arises from a
before Assignment Commodatum
When compensation takes effect by operation 3. Where one of the debts arises from a
of law or automatically the debts are claim for support due by a gratuitous
extinguished to the concurrent amount. title.
If subsequently, the extinguished debt is 4. Where one of the debts consists in civil
assigned by the creditor to a third person, the liability arising from a penal offense.
debtor can raise the defense of compensation
with respect to the debt.
Rules on Application of Payments Apply to
order of Compensation
Where the Compensation has taken place after If a debtor has various debts which are
the Assignment susceptible of compensation, he must inform
Cases: the creditor which of them shall be subject of
1. Assignment is made with the consent of compensation
the debtor
2. Assignment is made without the
consent but with the knowledge of the Consent of Parties not Required in Legal
debtor. Compensation
3. Assignment is made without the 1. Compensation takes place automatically
knowledge of the debtor. by mere operation of law – From the
moment all the requisites mentioned
occur, compensation takes place
Compensation where debts are Payable at automatically even if the absence of
Different Places agreement between the parties.
This provision applies to Legal Compensation. 2. Full Legal Capacity of Parties not
The indemnity does not refer to the difference Required – As it takes place by
in the value of the things in their respective operation of law and without the act of
places but to the expense of the monetary any party, it is not required that the
exchange (in case of money debts) and parties have full legal capacity to give or
expenses of transportation (in case of things to receive, as the case may be.
be delivered). The indemnity shall be paid by
the person who raises the defense of
compensation.
Definition of Terms:
Foreign Exchange – Conversion of an amount of 1. Payment - May consist not only in the
money or currency of one country into an delivery of money but also giving of a
equivalent amount of another. thing, doing of an act, or not doing of an
act.

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2. Debt - May refer to an obligation to 13. Domicile – the place of a person’s

deliver money, to deliver a thing, to do habitual residence; the place where he
or not to do an act. has true fixed permanent home.
3. Substantial Performance – It is the 14. Residence – An element of domicile.
performance of the important or 15. Application of Payment – Designation
essential part of the contract and only a of the debt to which should be applied
small or minor part has not been carried the payment made by the debtor who
out. has various debts of the same kind in
4. Free Disposal of the Thing Due – It favor of one and the same creditor.
means the thing to be delivered must 16. Payment by Cession - another special
not be subject to any claim or lien or form of payment where it is the
encumbrance of a third person. assignment or abandonment of all the
5. Capacity to Alienate – It means the properties of the debtor for the benefit
person is not incapacitated to enter into of his creditors in order that the latter
contracts. may sell the same and apply the
6. Any Person Authorized to Receive it – proceeds thereof to the satisfaction of
It means not only the person authorized their credits.
by the creditor but also a person 17. Tender of Payment – act, on the part of
authorized by the law to receive the debtor, of offering to the creditor
payment. the thing or amount due.
7. Estoppel – Admission or representation 18. Consignation – act of depositing the
is rendered conclusive upon the person thing or amount due with the proper
making it and cannot be denied or court when the creditor does not desire
disproved as against the person relying or cannot receive it, after complying
thereon. (Asserting something contrary with the formalities required by law.
to what is implied by a previous action 19. Thing is Lost – When it perishes or goes
or statement of that person) out of commerce or disappears in such
8. Dation in Payment – conveyance a way that its existence is unknown.
(transfer) of ownership of a thing as an 20. Physical Impossibility – The debtor is
accepted equivalent of performance. incapacitated to perform the obligation.
9. Judicial Costs – Statutory amounts 21. Legal Impossibility – Occurs when the
allowed to a party to an action for his obligation cannot be performed
expenses incurred in the action. because it is rendered impossible by the
10. Legal Tender – The currency which if provision of law, although physically
offered by the debtor in the right possible.
amount, the creditor must accept in 22. Difficulty of Performance – When the
payment of the money. service has become so difficult as to be
11. Inflation – sharp sudden increase of manifestly beyond the contemplation of
money or credit or both without a parties.
corresponding increase in business 23. Condonation or Remission – Gratuitous
transactions. Inflation causes a drop in abandonment by the creditor of his
the value of money, resulting in the rise right against the debtor.
of the general price level. 24. Complete Remission – When the
12. Deflation - the reduction in the volume gratuitous abandonment covers the
and circulation of the availability money entire obligation.
or credit, resulting in a decline of the 25. Partial Remission – Then the gratuitous
general price level. abandonment does not cover the entire
obligation.

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26. Expressed Remission – Gratuitous

abandonment made either verbally or
in writing.
27. Implied Remission – Gratuitous
abandonment inferred only in conduct.
28. Inter Vivos Remission – Gratuitous
abandonment that take effect during
the lifetime of the donor.
29. Mortis Causa Remission – Gratuitous
abandonment that becomes effective
upon the death of the donor.
30. Inofficious Remission – Donation given
more than which he can give by will.
31. Pledge - is a contract by virtue of which
the debtor delivers to the creditor or to
a third person a movable or instrument
evidencing incorporeal rights for the
purpose of securing the fulfillment of a
principal obligation with the
understanding that when the obligation
is fulfilled the thing delivered shall be
returned with its fruits and accessions.
32. Confusion or Merger - is the meeting in
one person of the qualities of creditor
and debtor with respect to the same
obligation.

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SECTION 6: NOVATION (ARTICLES 1291-1304) a. REAL OR OBJECTIVE – object

(cause) or principal conditions
of the obligation is changed
NOVATION – total or partial extinction of an b. PERSONAL OR SUBJECTIVE –
obligation through the creation of a new one person of the debtor is
which substitutes it. substituted and/or when a third
person is subrogated in the
It is the substitution or change of an obligation rights of the creditor
by another, which extinguishes or modifies the c. MIXED – object and/or principal
first, either by changing its object or principal conditions of the obligation and
conditions, or by substituting another in place the debtor or the creditor or
of the debtor, or by subrogating a third person both the parties, are changed. It
in the rights of the creditor. is a combination of real and
DUAL FUNCTION OF NOVATION personal

Novation is a contract containing two

stipulations: REQUISITES OF NOVATION
a) Extinguish and modify an existing a) A previous obligation
obligation b) Capacity and intention of the parties to
b) Substitute a new one in its place modify or extinguish the obligation
Novation is not absolute but only as a relative c) Modification or extinguishment of the
extinction because it creates a new one in place obligation
of the old which is only modified. d) Creation of a new valid obligation

KINDS OF NOVATION NOVATION IS NOT PRESUMED

a) According to origin: It must be clearly and unmistakably established

a. LEGAL – by operation of law either by the express agreement of the parties
b. CONVENTIONAL – by or acts equivalent import or by the
agreement of the parties incompatibility of the two obligations with each
b) According to how it is constituted: other in every material respect.
a. EXPRESS – so declared in
unequivocal terms
b. IMPLIED – old and the new TEST OF INCOMPATIBILITY BETWEEN TWO
obligations are essentially OBLIGATIONS OR CONTRACTS
incompatible with each other
c) According to extent or effect: The test is whether they can stand together,
a. TOTAL OR EXTINCTIVE – old each one having an independent existence. The
obligation is completely former obligation loses all its force and effect
extinguished and only the new obligation can be enforced.
b. PARTIAL OR MODIFICATORY –
old obligation is merely
modified, the change is merely KINDS OF PERSONAL NOVATION
incidental to the main
a) Substitution – person of the debtor is
obligation
substituted
d) According to the subject:

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b) Subrogation – third person is If the non-fulfillment of the obligation is due to

subrogated in the rights of the creditor other causes, the old debtor is not liable.
General rule – old debtor is not liable to the
creditor in case of insolvency of the new debtor
KINDS OF SUBSTITUTION
Exceptions:
a) Expromision – takes place when the
third person of his own initiative and a) Insolvency was already existing and
without the knowledge or against the public knowledge (although it was not
will of the original debtor assumes the known to the old debtor) at the time of
latter’s obligation with the consent of the delegacion
the creditor. It requires the consent of b) Insolvency was alreadt existing and
the third person and the creditor. The known to the debtor (although it was
old debtor must be released from his not of public knowledge) at the time of
obligation. the delegacion
b) Delegacion – creditor accepts a third
person to take place of the debtor at
the instance of the latter. Creditor may EFFECT OF NOVATION ON NECESSARY
withhold approval. All the parties (old OBLIGATION
and new debtor and the creditor) must
agree. General rule – extinguishment of the principal
obligation carried with it that of the accessory
obligation
RIGHT OF NEW DEBTOR WHO PAYS An accessory obligation created in favor of a
third person which remains in force unless said
a) Expromision – payment by the new
debtor gives him the right to beneficial third person said third person gives his consent
to the novation.
reimbursement
b) Payment was made with the consent
of the original debtor or on his own
initiative (delegacion) – debtor is EFFECT WHERE THE NEW OBLIGATION VOID
entitled to reimbursement and
General rule – no novation if the new obligation
subrogation
is void, therefore, the original one shall subsist
for the reason that the second obligation being
inexistent, it cannot extinguish or modify the
EFFECT OF NEW DEBTOR’S INSOLVENCY OR first.
NON-FULFILLMENT OF THE OBLIGATION IN
EXPROMISION
It will not revive the action of the creditor EFFECT WHERE THE NEW OBLIGATION
against the old debtor whose obligation is VOIDABLE
extinguished by the assumption of the debt by
Novation can still take place. If annulled,
the new debtor.
novation must be considered as not having
taken place, and the original one can be
enforced, unless the intention of the parties is
EFFECT OF NEW DEBTOR’S INSOLVENCY OR otherwise.
NON-FULFILLMENT OF THE OBLIGATION IN
DELEGACION

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EFFECT WHERE THE OLD OBLIGATION VOID OR CONSENT OF THE PARTIES REQUIRED IN
VOIDABLE CONVENTIONAL SUBROGATION
If the original obligation is voidable or if the a) Debtor – he becomes liable under the
voidable obligation is validated by ratification, new obligation to a new creditor
the novation is valid. b) Old creditor – his rights against the
debtor is extinguished
PRESUMPTION WHERE ORIGINAL OBLIGATION c) New creditor – he may dislike or
SUBJECT TO A CONDITION distrust the debtor
If the first subject is subject to a suspensive or
resolutory condition, the second is deemed
subject to the same condition unless the CASES OF LEGAL SUBROGATION
contrary is stipulated by the parties in the
contract. a) When a creditor pays another creditor,
who is preferred.
The efficacy of the new obligation depends b) When a third person without interest in
upon whether the condition which affects the the obligation pays with the approval of
old obligation is complied with or not. the debtor.
c) When a third person with the interest in
If suspensive and not complied with – no
the obligation pays even without the
obligation arises
knowledge of the debtor
If resolutory and complied with – old obligation
is extinguished
EFFECT OF LEGAL SUBROGATION
To transfer to the new creditor and all the rights
SUBROGATION – substitution of one person
and actions that could have been exercised by
(subrogee) in the place of the creditor
the former creditor either against the debtor or
(subroger) with reference to a lawful claim or
against the third persons, be they guarantors or
right, giving the former all the rights of the
mortgagors. Except only for the change in the
latter including the right to employ all remedies
person of the creditor, the obligation subsists in
to enforce payment
all respects as before the novation.

KINDS OF SUBROGATION
EFFECT OF PARTIAL SUBROGATION
a) CONVENTIONAL – takes place by
The creditor to whom partial payment has been
express agreement of the original
made by the new creditor remains a creditor to
parties (debtor and original creditor)
the extent of the balance of the debt.
and the third person (new creditor)
b) LEGAL – takes place without agreement In case of insolvency of the debtor – given a
but by operation of law preferential right to recover the remainder
against the new creditor.
Conventional subrogation – clearly established
in order that it may take place
Legal subrogation – not presumed except in the
cases expressly provided by law

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