Chapter 4

section 3
Articles 1270 - 1304
 CHAPTER 4
EXTINGUISHMENT OF
OBLIGATIONS

SECTION 3.
Condonation or Remission of Debt

Article 1270 - Condonation or remission is essentially gratuitous, and requires the

acceptance by the obligor. It may be made expressly or impliedly.

One and the other kind shall be subject to the rules which govern inofficious
donations. Express condonation shall, furthermore, comply with the forms of
donation. (1187)

Ms. Jakielou Rosales GROUP 4

 What is Condonation or Remission?
Condonation or remission is the gratuitous abandonment by the creditor of his right against the debtor.
It is thus a form of donation.

Illustration 1:
A owes B P100, 000 payable on Sep. 20, 2021. On due date B told A that A need not to pay him
because he is condoning A's debt. A then thanked and hugged B.

Illustration 2:
D owes C P3, 000,000. The debt is evidenced by a promissory note. C informs D that he will no longer
collect the debt and delivers the promissory note to D. D accepts C's generosity. D's obligation is
extinguished by condonation or remission.

Ms. Jakielou Rosales GROUP 4

 Essential Requisites of condonation or remission

The requisites are the following:

● There must be an agreement;

● It must be gratuitous;
● The parties must be capacitated to give consent and must actually consent;
● It must be accepted by the obligor;
● The cause or consideration must be liberality or generosity;
● The obligation must be demandable at the time of remission;
● It must not be inofficious;
inofficious means showing neglect of moral duty and
● If made expressly, it must comply with the forms of donations.

Ms. Jakielou Rosales GROUP 4

 Kinds of remission

They are:
1. As to its extent:

a. Complete/Total – when it covers the entire obligation.

● For example, Person A borrowed money from person B, P50, 000. Person C guaranteed the
payment of the loan. If Person B waives person A’s obligation to pay loan of P50, 000, the
remission extinguishes the whole obligation.

b. Partial – when it does not cover the entire obligation.

● For example, Pedro borrowed P100, 000 from Juan. To secure the loan, Maria was convinced to
mortgage her property to Juan. If Juan released the mortgage by remission, Maria’s property is
freed from the obligation. But the principal obligation of Pedro which is the loan shall remain
without any collateral or security.

Ms. Jakielou Rosales GROUP 4

 2. As to its form:

a. Express or Formal – when it is made either verbally or in writing.

 
It must comply with the formalities of donation as follows:
 
1. When the remission involves an immovable property, the remission and the acceptance must be in a
public instrument.

2. When the remission involves a movable/personal property

 
a. If the value of the property exceeds P5, 000, the remission and the acceptance must be in writing
(public or private).

b. If the value of the property is P5, 000 or less, the remission and the acceptance may be in any form,
i.e., oral or in writing (public or private). The remission, however, if made orally requires the
simultaneous delivery of the thing or the document presenting the right remitted.
Ms. Jakielou Rosales GROUP 4
 b. Implied or Tacit – when it can only be inferred from the conduct of the parties.

3. As to its date of effectivity:

 
a. Inter Vivos – when it will take effect during the lifetime of the donor.

b. Mortis Causa – when it will become effective upon the death of the donor. It must comply with the
formalities of a will.

Ms. Jakielou Rosales GROUP 4

 Effect of inofficious remission

While a person may make donations, no one can give more than that which he can give by will;
otherwise, the excess shall be inofficious and shall be reduced by the court accordingly.

As a rule, testamentary dispositions which impair the legitime shall be reduced on petition of the heirs
insofar as they are inofficious or excessive.

Incidentally, legitime is the part of the testator’s property which he cannot dispose of because the law
has reserved it for certain heirs (like the children with respect to their parents) who are, therefore,
called compulsory heirs.

Example:
A (widower), died and his only heir, his son B, is still alive. In A's last will and testament, he
renounced a debt due him from C, amounting P50, 000. The debt constituted his only state.

Ms. Jakielou Rosales GROUP 4

 Article 1271- The delivery of a private document evidencing a credit, made
voluntarily by the creditor to the debtor, implies the renunciation of the
action which the former had against the latter.

If in order to nullify this waiver it should be claimed to be inofficious, the

debtor and his heirs may uphold it by proving that the delivery of the
document was made in virtue of payment of the debt. (1188)

Ms. Jakielou Rosales GROUP 4

 Presumptions in case of voluntary delivery of document of indebtedness by creditor

1. Presumption of implied remission – This article gives an example of implied or tacit remission. If
the debt is not yet paid, the creditor would need the document to enforce payment. In case he
voluntarily delivers it to the debtor, the only logical inference is that he is renouncing his right.
 
2. Contrary evidence – The presumption is prima facie or rebuttable by contrary evidence. Evidence is
admissible to show otherwise, as when a receipt signed by the creditor was delivered only for
examination by the debtor client (lawyer) of the amount of attorney’s fees to be paid by the latter.

3. Extent of remission – If the obligation is joint, the presumption of remission pertains only to the
share of the debtor who is in possession of the document; if solidary, to the total obligation.
 
4. Presumption applicable only to private document (evidencing debt is found in the possession of
the debtor) – Article 1271 speaks of a private document. The legal presumption of remission does not
apply in the case of a public document because it is easy to obtain a copy of the same, being a public
record.
Ms. Jakielou Rosales GROUP 4
 Payment, not remission of debt

● Under the second paragraph of Article 1271, the renunciation of the action which the creditor had
against the debtor may be nullified or invalidated by a showing that the waiver is inofficious. In
other words, the remission becomes null and void upon proof that it is inofficious.

● The debtor or his heirs may prove that the delivery of the document was really made in virtue of
payment of the debt and not of remission.

Ms. Jakielou Rosales GROUP 4

 Article 1272 - Whenever the private document in which the debt appears is
found in the possession of the debtor, it shall be presumed that the
creditor delivered it voluntarily, unless the contrary is proved. (1189)

Ms. Jakielou Rosales GROUP 4

 Presumption in case document found in possession of debtor

Ordinarily, the document evidencing the debt is in the possession of the creditor. He has in favor the
legal presumption that his credit is as yet uncollected, unless the debtor proves satisfactorily, by one
(1) of the rules recognized in law, that he has already paid the claim.

If the document is later found in the hands of the debtor and it is not known how he came into
possession of the same, the presumption is that it was voluntarily delivered by the creditor. This
presumption of voluntary delivery, in turn, gives rise to the presumption of remission. (Art. 1271)

It is believed, however that the presumption of voluntary delivery should give rise to the presumption
of payment and only when it is known that indeed there is no payment should there be a presumption
of remission.

Ms. Jakielou Rosales GROUP 4

 EXAMPLE:

D owes C P1, 000 evidenced by a promissory note. The note signed by D, is given to C.

If the promissory note is voluntarily delivered to D, the presumption is that the debt must have been
paid by D. If it is known that D has not yet paid C, it must be presumed that the obligation has been
remitted by C under Art. 1271.

Suppose it is not known how D came into possession of the promissory note. The presumption is that it
was voluntarily delivered by C, unless C proves the contrary. (Art. 1272)

Ms. Jakielou Rosales GROUP 4

 Article 1273 - The renunciation of the principal debt shall extinguish the
accessory obligations; but the waiver of the latter shall leave the former
in force. (1190)

Ms. Jakielou Rosales GROUP 4

 Effect of renunciation of the principal debt of the accessory obligation and vice versa

The above provision follows the rule that the accessory follows the principal. While the accessory
obligations cannot exist without the principal obligation, the latter may exist without the former (see
Art. 1230).

EXAMPLE:

Remission of Principal Debt and its Effect on Accessory Obligation

Pedro borrowed money from Juan, P20, 000. Maria guaranteed the payment of the loan. Juan remitted
the entire obligation of Pedro. This remission extinguishes the whole obligation.

Remission of the Accessory Obligation and its Effect on Principal Obligation

D owes C P1, 000 with G as the guarantor. The remission of the debt of D by C shall extinguish the
guaranty of G. But if only the guaranty of G is condoned, the obligation of D shall remain in force.

Ms. Jakielou Rosales GROUP 4

 Article 1274 - It is presumed that the accessory obligation of pledge has
been remitted when the thing pledged, after its delivery to the creditor, is
found in the possession of the debtor, or of a third person who owns the
thing. (1191a)

Ms. Jakielou Rosales GROUP 4

 Presumption when thing pledged after its delivery to the creditor is found in the possession of the
debtor or of a third person who owns the thing.

In a contract of pledge, it is necessary that the thing pledged be placed in the possession of the creditor,
or of a third person by common agreement. (Art. 2093) A third person who is not a party to the
principal obligation may secure the latter by pledging his own property. (Art. 2085, last paragraph)

If the thing pledged is later found in the hands of the debtor or the third person only the accessory
obligation of pledge is presumed remitted, not the obligation itself. The debtor shall continue to be
indebted but he does not have to return the thing pledged. The presumption yields to contrary evidence.
It does not arise if the third person in possession of the thing pledged does not own the same.

Ms. Jakielou Rosales GROUP 4

 EXAMPLE:

Jakie delivers to Marchy her diamond ring in pledge to guarantee the payment of a loan. If later on, the
ring is found in the possession of Jakie, the presumption is that Marchy has agreed to the loan without
the pledge. Marchy may prove that he returned the ring to Jakie upon the latter’s request to be
delivered back to her.

Ms. Jakielou Rosales GROUP 4

 CHAPTER 4
EXTINGUISHMENT OF
OBLIGATIONS

SECTION 4.
Confusion or Merger of Rights

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

Ms. Zweath Stiffy Dayot GROUP 4

 What is Confusion or merger?
Confusion or merger is the meeting in one person of the qualities of creditor or debtor with
respect to the same obligation.

Reasons or basis for confusion.

1. The law treats confusion or merger as a mode of extinguishing obligations.

2. When there is a confusion of rights, the purposes for which the obligation may have
been created are deemed realized.

Ms. Zweath Stiffy Dayot GROUP 4

 Requisites of confusion.
For a valid confusion or merger to take place, it is necessary that;

1. It must take place between the principal debt and creditor; and
2. It must be complete.

Illustration:

Wanda owes Tony fifty thousand pesos. Before Tony can collect, he dies and the credit passes on to his
heir Morgan. Sometime in 2018, Morgan owed Wanda the amount of fifty thousand arising from
Morgan’s purchase of a racing horse. So there is now a merger of creditor and debtor in one person.

Ms. Zweath Stiffy Dayot GROUP 4

 Article 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)

Merger- It is the meeting of one person of the qualities of creditor and debtor with respect to the same
obligation.

Guarantor- is a person or an organization that promises to pay a debt owed by a second person, if the latter
fails to repay it.

Ms. Zweath Stiffy Dayot GROUP 4

 Effect of merger in the person of principal debtor or creditor.

Merger in the person of the principal debtor or creditor extinguishes the obligation.
Hence, the accessory obligation of guaranty is also extinguished in accordance with the
principle that the accessory follows the principal.

Effect of merger in the person of guarantor.

The extinguishment of the accessory obligation does not carry with it that of the
principal obligation. Consequently, merger, which takes place in the person of the
guarantor, while extinguishes the guaranty, leaves the principal obligation in force.

Ms. Zweath Stiffy Dayot GROUP 4

 Effect of merger in the person of principal debtor or creditor.

Illustration 1:
Natasha is indebted to Clint with Peggy as guarantor. Clint later on assigned his right to Kate who then
assigned her right back to Natasha.

Similarly, merger which takes place in the person of Clint benefits Peggy because the extinction of the
principal obligation carries with it that of the accessory obligation of guaranty.

Illustration 2:
Joey owes Chandler P300,000.00, guaranteed by Monica. Chandler assigns his right to Rachel who
assigns her right to Ross, and Ross assigns his right to Joey.

Effect: Joey’s obligation is extinguished. Monica is released from her obligation. Monica, the
guarantor, was benefitted.

Ms. Zweath Stiffy Dayot GROUP 4

 Effect of merger in the person of guarantor.

Illustration 1:
Suppose, in the previous example, Clint assigns his credit to Bucky who, in turn, assigns the credit to
Peggy, the guarantor.

In this case, the contract of guaranty is extinguished. However, Natasha’s obligation to pay the
principal obligation subsists. Peggy now, as the new creditor, can demand payment from Natasha.

Illustration 2:
Joey owes Chandler P300,000.00, guaranteed by Monica. Chandler assigns his right to Rachel who
assigns her right to Ross, and Ross assigns his right to Monica.

Effect: Joey still have to pay Monica. However, the contract of guaranty is extinguished, but not Joey’s
obligation to pay the P300, 000.00. Monica, as the new creditor can demand payment from Joey.

Ms. Zweath Stiffy Dayot GROUP 4

 Article 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)

Ms. Zweath Stiffy Dayot GROUP 4

 Confusion in a JOINT OBLIGATION.

In a joint obligation, there are as many debts as there are debtors and as many credits as there are
creditors, the debts and/or credits being considered distinct and separate from one another. (Art. 1208.)

Example:

Tony, Thor, and Steve are jointly liable to Bruce in the amount of P9,000 evidenced by a negotiable
promissory note. Bruce indorced the note to Natasha, who, in turn, indorsed it to Tony.

Ms. Zweath Stiffy Dayot GROUP 4

 Confusion in a SOLIDARY OBLIGATION.

Merger in the person of one of the solidary debtors shall extinguish the entire obligation because
it is also a merger in the other solidary debtors. (Art. 1215.)

He who makes payment may claim reimbursement from his co debtors for the shares which
correspond to them. (Art. 1217, par. 2.)

Example:

In the same example given previously, if the obligation of Tony, Thor, and Steve is solidary, the
indorsement to Tony extinguishes the entire obligation of P9,000. Tony can demand reimbursement
from Thor and Steve.

Ms. Zweath Stiffy Dayot GROUP 4

 CHAPTER 4
EXTINGUISHMENT OF
OBLIGATIONS

SECTION 5.
Compensation

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

Ms. Zweath Stiffy Dayot GROUP 4

 What is Compensation?
Compensation is the extinguishment to the concurrent amount of the debts of two persons
who, in their own right, are debtors and creditors of each other.

Example:

Gamora owes Nebula the amount of P1,000. The next day, Nebula borrowed Gamora the
amount of P600.

Question: Does Gamora still has to pay Nebula the amount of P1,000?

Ms. Zweath Stiffy Dayot GROUP 4

 Object of Compensation.

The object of compensation is the prevention of unnecessary litigations and payments.

This is accomplished through the mutual extinguishment by operation of law of concurring
debts of two (2) persons.

Ms. Zweath Stiffy Dayot GROUP 4

 Confusion and Compensation distinguished

Confusion Compensation

As to person 1. There is only one person who is 1. There are two persons involved.
a creditor and debtor of himself.
As to obligation 2. One obligation. 2. Two obligations.

As to payment 3. Impossibility of payment. 3. Indirect payment.

There may be compensation in joint and solidary obligations. (see Arts. 1207, 1208, 1215.)

Ms. Zweath Stiffy Dayot GROUP 4

 Kinds of compensation
They are;

1. By its effect or extent:

a. Total - when both obligations are of the same amount.

b. Partial- when the two obligations are of different amounts.

2. By its cause or origin:

a. Legal - when it takes place by operation of law even without the knowledge of the parties.
b. Voluntary - when it takes place by agreement of the parties.
c. Judicial - when it takes place by order from a court of litigation.
d. Facultative - when it can be set up only by one of the parties.

Ms. Zweath Stiffy Dayot GROUP 4

 Article 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)

Ms. Zweath Stiffy Dayot GROUP 4

 Requisites of legal compensation.
Article 1270 enumerates the requirements or requisites for legal compensation.

1. The parties are principal creditors and principal debtors of each other. –

Examples:
a. Thor owes Loki P10,000.
Loki owes Thor P10,000.

Compensation will take place because Thor and Loki are principal creditors and debtors of each other.

b. Thor owes Loki P10,000 with Frigga as guarantor.

Loki owes Frigga P10,000

There will be no compensation between Loki and Frigga because while Loki is principally liable to Frigga,
Frigga is merely subsidiarily liable to Loki. Hence, Frigga can demand payment from Loki.

Ms. Zweath Stiffy Dayot GROUP 4

 2. Both debts consist in a sum of money, or of consumable things of the same kind and quality. –

Examples:
a. Natasha owes Yelena P10,000.
Yelena owes Natasha a smartphone worth P10,000.

No compensation will take place.

b. Natasha obliged herself to deliver to Yelena 10 sacks of Jasmine rice.

Yelena obliged herself to deliver to Natasha 10 sacks of any rice.

Compensation will not also take place because of the lack of identity of the kind and quality of the rice due.

Ms. Zweath Stiffy Dayot GROUP 4

 3. The two debts are due or demandable. –

Examples:
a. Drax owes Mantis P10,000 due today.
Mantis owes Drax P10,000 due next month.

Compensation cannot take place as the debts are not due on the same date.

4. The two debts are liquidated. –

Examples:
a. Drax owes Mantis P10,000.
Mantis owes Drax the share of the latter in a business the amount of which is still to be
ascertained.

Compensation will not take place as the debt of Mantis is not liquidated.

Ms. Zweath Stiffy Dayot GROUP 4

 5. No retention or controversy commenced by a third person. –

There is said to be retention when the credit of one of the parties is subject to the satisfaction of the claims of
a third person, while a controversy exists when a third person claims he is the creditor of one of the parties.

Examples:
a. Scott owes Hope P10,000.
Hope owes Scott P10,000.
Hope also owes Hank P10,000.

In this case, compensation cannot take place between Scott and Hope in view of a controversy commenced
by Hank, a third person. In the meantime, the compensation is suspended.

Ms. Zweath Stiffy Dayot GROUP 4

 Article 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)

Ms. Zweath Stiffy Dayot GROUP 4

 Article 1280 speaks of…

Legal compensation
● takes place by operation of law even against the will of the interested parties and even w/ their consent
● takes place the moment there exists a reciprocal concurrence of debts and all the requisites of law are
present

Voluntary/conventional compensation
● affords the parties the freedom to agree on terms

Ms. Zweath Stiffy Dayot GROUP 4

 Compensation benefits guarantor.

This article is an exception to the general rule that only the principal debtor can set up against his
creditor what the latter owes him.

Although the guarantor is only subsidiarily, not principally bound, he is given the right to set up
compensation.

Example:
Jane owes Darcy ₱50,000 secured by a guarantor, Fury.
Darcy owes Jane ₱50,000.

Ms. Zweath Stiffy Dayot GROUP 4

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

Total and partial compensation

• Total Compensation results when (2) two debts are of the same amount. (Art. 1281). If they
are of different amounts, compensation is total as regards the smaller debt, and partial only
with respect to the larger debt. (supra).

Example:

(Total Compensation) (Partial Compensation)

A owes B 2000 A owes B 2000
B owes A 2000 B owes A 1500

Ms. Denisse Izza Vergara GROUP 4

 Article 1282. The parties may agree upon the compensation of debts which
are not yet due.
Voluntary Compensation
• This provision of law is an exception to the general rule that only debts which are due and demandable
can be compensated. (Article 1279).
• This kind of compensation has no special requisites. It is sufficient that the contract of the parties,
which declares the compensation is valid.

Example:
A owed B the amount of P5,000.00 that will be due on November 20, 2021. B owed C the amount of
P5,000.00 that will be due on December 1, 2021. They agreed that there will be no payment on
November 20, 2021but instead be on December 1, 2021so that all will be free from obligation before
the due date.

Ms. Denisse Izza Vergara GROUP 4

 Article 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.
Judicial Compensation
• Compensation may also take place when so declared by a final judgment of a court in a suit. A party
may set off his claim for damages against his obligation to the other party by proving his right to said
damages and the amount thereof.
 
Example:
A owes B P1,000. When B demanded payment, A failed to pay. In anger, B damaged the property of A
to the extent of P800.

A can set off the obligation of B to pay him damages in the amount of P800 against the debt of P1,000.

Ms. Denisse Izza Vergara GROUP 4

 Article 1284. When one or both debts are rescissible or voidable, they may
be compensated against each other before they are judicially rescind or
voided.
 
Compensation of rescissible or voidable debts
• Rescissible (Art. 1381) and voidable obligations (Art. 1390) are valid until they have been judicially
rescinded or avoided. Prior to rescission or annulment, the debts may be compensated against each
other

Example:
D owes C 1000. Subsequently, D, through fraud, was able to make C sign a promissory note that C is
indebted to D for the same amount.
The debt of D is valid but that of C is voidable. Before the debt of C is nullified, both debts may be
compensated against each other if all the requisites for legal compensation are present.
Suppose C's debt is later o annulled by the court, is D still liable considering that compensation had already
taken place? 

Ms. Denisse Izza Vergara GROUP 4

 Article 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 nit 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.”
Ms. Denisse Izza Vergara GROUP 4
 Where compensation has taken place before assignment.

● When compensation takes effect by operation of law or automatically, the debts are extinguished to the
concurrent amount.
● If subsequently, the extinguished debt is assigned by the creditor to a third person, the debtor can raise
the defense of compensation with respect to the debt. The remedy of the assignee is against the assignor.
Of course, the right to the compensation may be waived by the debtor before or after the assignment.
Example:
A owes B 3000 due yesterday.
B owes A 1000 due also yesterday.
Both debts are extinguished up the amount 1000. Hence, A still owes B 2000 today.
Hence, A still owes B P2,000 today.
● Now, if B assigns his right to C, the latter can collect only P2,000 from A.
● However, if A gave his consent to the assignment before it was made or subsequently, A losses the right
to set up the defense of compensation. So A will be liable to C for P3,000 but he can still collect the
P1,000 owned by B.

Ms. Denisse Izza Vergara GROUP 4

 Where Compensation has taken place after assignment.
Three cases of Compensation which take place after an assignment of rights made by the creditor:

(1) Assignment with the consent of debtor -

Example:
A owes B 3000 due November 15
B owes A 1000 due November 15
B assigned his right to C on November 1 with the consent of A

● On Nov. 30, A cannot set up against C, the assignee, the compensation which would pertain to him
against B, the assignor.

● However, if A, while consenting to the assignment, reserved his right to the compensation, he would be
liable only for P2,000 to C. (par 1.)

Ms. Denisse Izza Vergara GROUP 4

 (2) Assignment with the knowledge but without the consent of debtor. –

Example:
A owes B 1000 due December 1.
B owes A 2000 due December 5.
A owes B 1000 due December 15
● A assigned his right to C on November 12. A notified B but the latter did not give his consent to the assignment.
How much can C collect from B?

(3) Assignment without the knowledge of the debtor. –

Example:
In the preceding example, lets us suppose that the assignment was made without the knowledge of B who learned of
the assignment only on December 25.
● In this case, B can set up the compensation of credits before and after the assignment. The crucial time is when B
acquired knowledge of the assignment and not the date of the assignment. If B learned of the assignment after the
debts had already matured, he can raise the defense of compensation; otherwise, he cannot.

Ms. Denisse Izza Vergara GROUP 4

 Article 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.

Compensation where debts payable at different places.

● This article applies to legal compensation. The indemnity contemplated above does, not refer to the
difference in the value of the things in their respective places but to the expenses of monetary exchange
(in case of money debts) and expenses of transportation (in case of things to be delivered). Once these
expenses are liquidated, the debts also become compensable. The indemnity shall be paid by the person
who raises the defense of compensation.

Ms. Denisse Izza Vergara GROUP 4

 Foreign Exchange- the conversion of an amount of money or currency of one (1) country into an equivalent
amount of money or currency of another.

Exchange Rate- the price of one currency expressed or quoted in relation to another currency.

Example:
A owes B $1,000 payable in New York. B owes A P50,000 (equivalent amount) payable in Manila.
● If A claims compensation, he must pay for the expenses of exchange.

Ms. Denisse Izza Vergara GROUP 4

 Article 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)

Ms. Darlene Taniongon GROUP 4

 Compensation not allowed by Law:

1. Where one the debts arises from a depositum.

Ex. A owes B P10,000, In turn, owes A the amount of P10,000 representing the value of a ring
deposited by A with B which B failed to return.

2. Where one of the debts arises from a commadatum.

Ex. A entrusted a Diamond ring to B, which should be returned to A undamaged if he needs it.

3. Where one of the debt arises from a claim for support due by gratuitous title.

Ex. B is the father of A, a minor, who under the law is entitled to be supported by B. Now A owes B
100,000.

4. Where one of the debts consists in civil liability arising from a penal offense.
Mr. Darlene Taniongon GROUP 4
 Article 1288. Neither shall there be compensation if one of the debts
consists in civil liability arising from the penal clause (n)
 

EXAMPLE:
D owes C  P10,000.00. C stole the ring of D worth P10,000.00.

Here, Compensation by C is not proper.

Mr. Darlene Taniongon GROUP 4

 Article 1289. If a person should have against him several debts which
are susceptible of (sic) compensation, the rules on the application of
payments shall apply to the order of the compensation. (1201)

Mr. Darlene Taniongon GROUP 4

 Rules on application of payments applicable to order of compensation.

● Compensation is similar to payment. If a debtor has various debts which are susceptible of
compensation, he must inform the creditor which of them shall be the object of compensation. In
case he fails to do so, then the compensation shall be applied to the most onerous obligation.

EXAMPLE: Cezar Montanow is indebted to Raffy Tofu in the amount of:

(1) P1,000.00 without interest due today;

(2) P1,000.00 with interest of 12% due to also today; and
(3) P1,000.00 with interest of 10% due yesterday.

Raffy Tofu owes Cezar Montanow P1,000.00 due today.

Mr. Darlene Taniongon GROUP 4

 Article 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.

Consent of parties not required in legal compensation.

● Compensation occurs automatically by mere operation of law. 

● Full legal capacity of parties not required. 

Mr. Darlene Taniongon GROUP 4

 CHAPTER 4
EXTINGUISHMENT OF
OBLIGATIONS

SECTION 6.
Novation

Article 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) 

Mr. Darlene Taniongon GROUP 4

 Novation is the total or partial extinction of an obligation through the creation of a new one which
substitutes it.

Novation Would Have Dual Functions:

● one to extinguish an existing obligation
● to substitute a new one in its place

Mr. Darlene Taniongon GROUP 4

 Kinds of Novation
•According to origin:
a) Legal
b) Conventional
 
•According to how it is constituted:
a) Express
b) Implied
 
•According to extent or effect
a) Total or extinctive
b) Partial or modificatory
 
•According to subject
a) Real or objective
b) Personal or subjective
c) Mixed
Mr. Darlene Taniongon GROUP 4
 EXAMPLE:

1. Real Novation - S agreed to deliver B a car. Later, they entered into another contract whereby,
instead of S delivering a car, he would deliver 10 air conditioners.

2. Personal Novation - If after the constitution of the obligation, both parties agreed that C will
substitute for S or that D will be subrogated in the rights of B, there is a personal novation.

3. Mixed Novation - If the agreement of the parties is that S will deliver to D the 10 air conditioners,
instead of S delivering a car to B.

Mr. Darlene Taniongon GROUP 4

 Article 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

•A previous valid obligation

•Capacity and intention of the parties to modify or extinguish the obligation
•The modification or extinguishment of the obligation
•The creation of a new valid obligation

Mr. Darlene Taniongon GROUP 4

 Novation is not presumed
● It must be clearly and unmistakably established either by the express agreement of the parties or
acts of equivalent import or by the incompatibility of the two obligations with each other in every
material aspect.
 
EXAMPLE:
(1) S agreed to deliver to B a car on November 10. Subsequently, a second agreement was entered into
whereby S would deliver a truck on November 10.
 
(2) Suppose the obligation of S is to construct a house on a certain parcel of land. Subsequently, S
agreed to construct an apartment on the same parcel of land. The area of the land is such that both the
house and the apartment as per the building plans cannot be constructed on the same site.

Mr. Darlene Taniongon GROUP 4

 Article 1293. Novation which consist in substitution 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)

Kinds of personal Novation

● Substitution- when the person of the debtor is substituted.

● Subrogation- when a third person subrogated in the rights of the creditor.

Mr. Eddie Ray Obando GROUP 4

 Kinds of substitution

1. Expromision - initiative comes from a third person. The old debtor must be released from his
obligation; otherwise, there will be no expromision.

Example:
Debbie owes Celia P400,000.00. Mika, friend of Debbie, approaches Celia and tells her: “I will pay
you what Debbie owes you. From this moment, consider me your debtor, not Debbie. Debbie is to be
excused. Do you agree?” Celia agrees.

2. Delegacion - initiative comes from the debtor, for it is he who delegates another to pay the debt, and
thus, he excuses himself. Here, the three parties concerned—the old debtor, the new debtor, and the
creditor—must agree.

Mr. Eddie Ray Obando GROUP 4

 Article 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.

Effect of new debtor’s insolvency or non-fulfillment of the obligation in expromision.

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 is extinguished by the assumption of the
debt of the debt by the new debtor.

Mr. Eddie Ray Obando GROUP 4

 Article 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.

Effect of new debtor’s insolvency or nonfulfillment of the obligation in delegation.

If the new debtor who has been accepted by the creditor, happens to be insolvent and cannot fulfill the
obligation delegated to him, the original debtor is no longer liable anymore for the payment of the
obligation.

Mr. Eddie Ray Obando GROUP 4

 The exceptions are:

1. The said insolvency was already existing and of public knowledge at the time of the
delegacion; or
2. The insolvency was already existing and known to the original debtor at the time of
delegacion.

Example:
Pedro is indebted to Petra with 1000.00. Pedro proposed Pete to be the new debtor and obtained the
consent of Petra. If at the time of the delegacion Pete was already insolvent but his insolvency was
neither of public knowledge nor known to Pedro, then Pedro is not liable. Neither is Pedro liable if the
insolvency of Pete took place after he delegated his debt.

Mr. Eddie Ray Obando GROUP 4

 Article 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.

Effect of novation on accessory obligations.

GENERAL RULE | The extinguishment of the principal obligation carries with it that of the accessory
obligations.
EXCEPTION | Accessory obligations subsist insofar as they benefit third persons who have NOT
given their consent to the novation.

Mr. Eddie Ray Obando GROUP 4

 Example:

A owes B P12,000 with interest at 14%. B owes C P280.

It was agreed among the parties that A would pay the interest of P280 to C. In this case, besides the
principal obligation of A, there is a stipulation in favor of C, a third person. Later on, A and B executed
another contract whereby they agreed that A would deliver to B a television set in payment of the loan.

In spite of the novation, the accessory obligation to pay the interest of P280 to C subsists unless C
gives his consent to the novation.

Mr. Eddie Ray Obando GROUP 4

 Article 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.

Example:
Bryan is indebted to Anne in the amount of Php 1, 000.00. Since Bryan cannot pay his debt, Bryan and
Anne entered into a new contract whereby Bryan will kidnap and kill the enemy of Anne and the later
will consider Bryan debt extinguished. In this case, the original obligation of Bryan and Anne shall
subsist because the new obligation of Bryan to Anne is void it being against the law.

Mr. Eddie Ray Obando GROUP 4

 Article 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.

Effect where the old obligation void or voidable.

A void obligation cannot be novated because there is nothing to novate. However, if the original
obligation is only voidable or if the voidable obligation is validated by ratification, the novation is
valid.

Mr. Eddie Ray Obando GROUP 4

 Example:

1) Peter Madilim agreed to deliver prohibited drugs to vice-mayor Palo. Later on, it was agreed
that Peter Madilim would pay vice-mayor Palo P100,000.00 instead of delivering the drugs.

2) Suppose Peter Madilim was induced through fraud committed by vice-mayor Palo to sign a
contract whereby Peter Madilim obliged himself to deliver a specific car to vice-mayor Palo.
Subsequently, it was agreed between Peter Madilim and vice-mayor Palo that Peter Madilim
would give vice-mayor Palo P100,000.00 instead of the car.

3) In the same example, if Peter Madilim subsequently confirmed his obligation to deliver the
car and the right of vice-mayor Palo thereto, his ratification cleanses the contract from all its
defects and makes it valid and, therefore, the novation is also valid.

Mr. Eddie Ray Obando GROUP 4

 Article 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.

Illustration:

Mr. Fu promised to give Kate a car if Kate finished his degree in Accountancy with honors. Later, the
parties agreed that Mr. Fu would give Kate a house and lot instead of a car.

Question: Is the new obligation also subject to a condition?

Answer: YES, unless it is otherwise stipulated.

Mr. Josieme Torreon GROUP 4

 Article 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.

Mr. Josieme Torreon GROUP 4

 Kinds of Subrogation.

(1) Conventional – when it takes place by express agreement of the original parties (the debtor and
the original creditor) and the third person (the new creditor) (Art. 1301)
(2) Legal – when it takes place without agreement but by operation of law. (Art. 1302)

Conventional subrogation must be clearly established in order that it may take place.

Legal subrogation is not presumed except in the cases expressly provided by law.

Mr. Josieme Torreon GROUP 4

 Article 1301. Conventional subrogation of a third person requires the
consent of the original parties and of the third person.

Consent in all the parties required in conventional subrogation.

(1) the debtor – because he becomes liable under the new obligation to a new creditor.
(2) the old creditor – because his right against the debtor is extinguished.
(3) the new creditor – because he may dislike or distrust the debtor.

Mr. Josieme Torreon GROUP 4

 Article 1302. It is presumed that there is a 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.

Mr. Josieme Torreon GROUP 4

 Cases of LEGAL SUBROGATION.

1. When a creditor pays another creditor who is preferred, even without the debtor’s knowledge;

Example:
A owes B P60,000 secured by a mortgage on the land of A. A also owes C P20,000. This debt is
unsecured by a mortgage.

If C pays the debt of A to B, C will be subrogated in B’s right so that he can have the mortgage
foreclosed in case A fails to pay the P60,000 debt.

2. When a third person, not interested in the obligation, pays with the express or tacit approval of the
debtor;

Example:
A owes B P10,000. C pays B with the express and implied consent of A. C will be subrogated in the
rights of B.

Mr. Josieme Torreon GROUP 4

 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.

Example:
(1) A owes B P 80,000. If C (the guarantor of A) pays B even without the knowledge of A, C is
subrogated in the rights of B.

Confusion takes place in the person of C. Hence, the guaranty is extinguished but the principal
obligation still subsists.

Mr. Josieme Torreon GROUP 4

 Article 1303. Subrogation transfers to the person subrogated the credit
with all the rights thereto appertaining, either against the debtor or against
third persons, be they guarantors or possessors of mortgages, subject to
stipulation in a conventional subrogation.

Illustration:

John owes Rhea P10,000 and Beauty is the guarantor of John. If Roy paid Rhea with the
consent of the creditor and the debtor. Roy now is subrogated to the rights of Rhea, so that if
John cannot pay Roy P10,000 as reimbursement, Roy can proceeds against the guarantor.

Mr. Josieme Torreon GROUP 4

 Article 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.

Illustration:

D owes C P100,000. With the consent of both, T, a third person pays C P50,000. Thus, C
and T are now creditors of D at P50,000 each.

Question: If D has only P50,000, who will be preferred?

Answer: C will be preferred over T

Mr. Josieme Torreon GROUP 4

THANK YOU!
GROUP 4