SECTION 2 - Loss of the Thing Due

Art. 1262
An obligation which consists in the delivery of a determinate thing shall be extinguished if it
should be lost or destroyed without the fault of the debtor, and before he has incurred in delay.

When by law or stipulation, the obligor is liable even for fortuitous events, the loss of the things
does not extinguish the obligation, and he shall be responsible for damages. The same rule
applies when the nature of the obligation requires the assumption of risk. (1182a)
When a thing is considered lost
● A thing is considered lost when it:
○ Perishes
○ Goes out of commerce
○ Disappears in such a way that its existence is unknown or it cannot be recovered
● Loss of a determinate thing (under Art. 1262 par. 1):
○ Equivalent of impossibility of performance in obligations to do (referred to in Art.
1266)
○ “Loss of the thing due” extends to both obligations to give and obligations to do
(Art. 1231)

When loss of thing will extinguish an obligation to give

● Requisites for an obligation to be extinguished:
○ The obligation is to deliver a specific or determinate thing
○ The loss of the thing occurs without the fault of the debtor
○ The debtor is not guilty of delay

When loss of thing will not extinguish liability

● Cases where the loss of the specific thing (even in the absence of fault) will not exempt
the debtor from liability:
○ When the law so provides (Arts. 1170 and 1165)
○ When the stipulation so provides
○ When the nature of the obligation requires the assumption of risk (Art. 1174)
○ When the obligation to deliver a specific thing arises from a crime (Art. 1268)
Art. 1263
In an obligation to deliver a generic thing, the loss of destruction of anything of the same kind
does not extinguish the obligation.
Effect of loss of a generic thing
● The above article is an example of a case where the debtor is liable even for a fortuitous
event because the law says so.
● Based on ​genus nunquam perit ​(generic thing never perishes)
● Debtor can still be compelled to deliver a thing of the same kind.
● Creditor cannot demand a thing of superior quality, debtor cannot deliver a thing of
inferior quality
Art. 1264
The courts shall determine whether, under the circumstances, the partial loss of the object of
the obligation is so important as to extinguish the obligation
Effect of partial loss of a specific thing
● There is partial loss when only a portion of the thing is lost, destroyed, depreciates, ot
deteriorates.
● Partial loss is the equivalent of difficulty or performance in obligations to do.
● In case of partial loss, the court is given the discretion in case of disagreement between
parties, to determine whether under the circumstances it is so important in relation to the
whole as to extinguish the obligation.
● In other words, the court will decide whether the partial loss is such as to be equivalent
to a complete or total loss.

Art. 1265
Whenever the thing is lost in the possession of the debtor, it shall be presumed that the loss
was due to his fault, unless there is proof to the contrary, and without prejudice to the provisions
of article 1165. This presumption does not apply in case of earthquake, flood, storm, or other
natural calamity.
Presumption of fault in case of loss of thing in possession of debtor
● The article establishes a disputable presumption of fault whenever the thing to be
delivered is lost in the possession of the debtor.
● Debtor, who has the custody and care of the thing, can easily explain the circumstances
of the loss.
● Creditor has no duty to show that the debtor was at fault.
● Under Art. 1165 paragraph 3, the obligor, who is not at fault, is still liable in case he is
guilty of delay or has promised to deliver the same thing to two (2) or more persons who
do not have the same interest.

When presumption is not applicable

● “In case of natural calamities, the presumption of fault does not apply. Lack of fault on
the part of the debtor is more likely. So it is unjust to presume the negligence on his
part.”

Art. 1266
The debtor in obligations to do shall be released when the prestation becomes legally or
physically impossible without the fault of the obligor.
Effect of impossibility of performance
● This articles refers to cases where, without the debtor’s fault, the obligation becomes
legally or physically impossible.
● The obligation will then be extinguished when the performance becomes impossible.
Kinds of impossibility
1.) Physical: takes place when the obligor dies or becomes physically incapacitated to
perform the obligation.
a.) This applies to pure personal obligations when the personal qualifications of the
obligor is involved.
2.) Legal: when the obligation cannot be performed because it is rendered impossible by
provision of law.
a.) In every contract, a condition is implied that the promisor shall be released from
his obligation if his performance is rendered impossible by law.

Art. 1267
When the service has become so difficult as to be manifestly beyond the contemplation of the
parties, the obligor may also be released therefrom, in whole or in part.
Effect of difficulty of performance
● GENERAL RULE - impossibility of the performance releases the obligor.
● When the performance of the service ​has become so difficult, the court is authorized to
release the obligor in whole or in part.
○ Has become so difficult in terms of difficulty going beyond the contemplation of
both parties.
● There would be violence to the intention of the parties if the obligor was held
responsible.
● There is an element of the unforeseen or fortuitous event in the situation covered by Art.
1276
● This article (1267) is applies to both personal obligations to do and to real obligations to
give or deliver.

Art. 1268
When the debt of a thing certain and determinate proceeds from a criminal offense, the debtor
shall not be exempted from the payment of its price, whatever may be the cause for the loss,
unless the thing having been offered by him to the person who should receive it, the latter
refused without justification to accept it.
Effect of fortuitous event where obligation proceeds from a criminal offense
● This article is another instance where a fortuitous event does not exempt the debtor from
liability.
● Obligation subsists (remains/is in effect) when the creditor refused to accept the thing
without justification, after it had been offered to him.
● Consignation is not necessary.
● The debtor must still exercise due diligence.
Art. 1269
The obligation having been extinguished by the loss of the thing, the creditor shall have all rights
of action which the debtor may have against third persons by reason of the loss.
Right of creditor to proceed against third persons
● Creditor is given the right to proceed against the third person responsible for the loss.
● No need for an assignment by the debtor.
● The rights of action of the debtor are transferred to the creditor from the moment the
obligation is extinguished.
○ By operation of law to protect the interest of the latter by reason of the loss.

Loss of the Thing Due ​(Articles 1262-1269)

● Loss of the thing here is not to be taken in the strict legal meaning of ―loss‖. Loss can
be applied in an obligation to give a determinate thing (Article 1262), in an obligation to
give a generic thing (Article 1263) and in an obligation to do (Article 1266).
● The term loss embraces all causes which may render impossible the performance of the
prestations – impossibility of performance
● A thing is lost when it perishes, or goes out of commerce, or disappears in such a way
that its existence is unknown or it cannot be recovered.
● When the debt of a thing certain and determinate proceeds from a criminal offense, the
debtor shall not be exempted from the payment of its price, whatever may be the cause
for the loss, unless the thing having been offered by him to the person who should
receive it, the latter refused without justification to accept it (Article 1268).
● Kinds of Impossibility According to Time
A. Original Impossibility
■ If the impossibility had already existed when the contract was made, then
the result is not extinguishments but inefficacy of the obligation under
Articles 1348 and 1493. The contract is void.
B. Supervening Impossibility
■ The impossibility of performance must be subsequent to the execution of
the contract in order to extinguish the obligation.
○ Change in the Circumstances
○ Rebus sic stantibus literally means ‘things as they stand’, or
‘things thus standing’, It is short for clausula rebus sic stantibus –
agreement of things as they stand. Also called Riesgo imprevisible
(Spanish), Theorie d’imprevision (French) and Verschuvinden des
Grundgeschäftes (German).
1. Art. 1267. When the service has become so difficult as to be manifestly beyond
the contemplation of the parties, the obligor may also be released therefrom, in
whole or in part.
■ The underlying philosophy here is that when parties enter into an
agreement, the parties contemplate existing circumstances. When things
supervene, the parties may be discharged because they did not
contemplate such difficult circumstances.
 ■ This doctrine is also called the doctrine of extreme difficulty and
frustration of commercial object or enterprise.
■ The attitude of the courts on this doctrine is very strict. This principle has
always been strictly applied. To give it a liberal application is to undermine
the binding force of an obligation. Every obligation is difficult. The
performance must be extremely difficult in order for rebus sic stantibus to
apply.
○ Rebus Sic Stantibus - in public international law, is the legal
doctrine allowing for a treaty to become inapplicable because of a
fundamental change of circumstances.
■ Requisites
i. The event or change could not have been foreseen at the time of
the execution of the contract
ii. The event or change makes the performance extremely difficult
but not impossible
iii. The event must not be due to an act of either party
iv. The contract is for a future prestation.
■ If the contract is of immediate fulfillment, the gross inequality of the
reciprocal prestation may involve lesion or want of cause.
● Obligation to Give
1. Obligation to give a determinate thing
■ The happening of a fortuitous event in itself does not necessarily
extinguish an obligation to deliver a determinate thing. An obligation
consisting in the delivery of a specified thing, shall be extinguished when
the said thing is lost or destroyed without the fault of the obligor and
before he is in default.
■ Whenever the thing is lost in the possession of the debtor, it shall be
presumed that the loss was due to his fault, unless there is proof to the
contrary, and without prejudice to the provisions of Article 1165. This
presumption does not apply in case of earthquake, flood, storm or other
natural calamity (Article 1265)
2. Obligation to give a generic thing
■ The happening of a fortuitous event does not extinguish the obligation to
deliver a generic thing Genus nunquam perit - ‘genus never perishes’.
This is the general rule. Sometimes, though, the entire genus perishes
because it becomes illegal.
■ What is not covered by this rule is an obligation to deliver a limited
generic.
i. Example: I promise to deliver to you one of my Amorsolos (I have
4). This is not generic because I only have four but not specific
because I did not specify which one. This is governed by Article
1262. In this case, the obligation may be extinguished by the loss
of all the things through fortuitous event.
 ● Obligation to do
○ The debtor in obligations to do shall also be released when the prestation
becomes legally or physically impossible without the fault of the obligor (Article
1266).
○ The impossibility here must be supervening. If it is original, then the contract is
void.
○ Kinds of Impossibility According to Nature
A. Objective Impossibility
■ In objective impossibility, the act cannot be done by anyone. The
effect of objective impossibility is to extinguish the obligation.
B. Subjective Impossibility
■ In subjective impossibility, the obligation becomes impossible only
with respect to the obligor. There are 3 views as to the effect of a
subjective impossibility:
i. The obligation is not extinguished. The obligor should ask
another to do the obligation.
ii. The obligation is extinguished.
iii. A third view distinguishes one prestation which is very
personal and one which are not personal such that
subjective impossibility is a cause for extinguishes a very
personal obligation but not an obligation which is not very
personal.
● Effect of Loss on Creditor‘s Rights
1. The obligation having been extinguished by the loss of the thing, the creditor
shall have all the rights of action which the debtor may have against the third
person by reason of the loss.
■ A common example of this is insurance.

SECTION 3 - Condonation or Remission of the Debt

Art. 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)
● Condonation - implied forgiveness
● Remission - A release from debt or claim
● Gratuitous - given without consideration
● Inofficious - contrary to moral obligation, as the disinheritance of a child by his parents;
an inofficious will
Kinds of Remission
● As to its form;
○ Express - when it is made either verbally or in writing
○ Implied - when it can only be inferred from conduct
● As to the extent;
○ Complete/total - when it covers the entire obligation
○ Partial Remission - when it does not cover the entire obligation
● As to the manner of remission
○ Inter Vivos - when it will take effect during the lifetime of the donor
○ Mortis causa - when it will become effective upon the death of the donor. It myst
comply with the formalities of a will

Art. 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)

Presumption in case of voluntary delivery of indebtedness by creditor​:

● Presumption of implied remission – the 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 interference is
that he is renouncing his right. Contrary Evidence – The presumption is prima facieor
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 fee to be paid by the latter.
● 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.
● Presumption applicable only to private document – 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
● Under second paragraph of Article 1271, the renunciation of the action which the creditor
had against the debtor maybe nullified or invalidate by showing that the waiver is
inofficious. In other words the remission becomes null and void upon proof that it is
inofficious.
Art. 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)
● The presumption of remission of the obligation in favor of the debtor will always rule over
in the case when the instrument of credit is found with the debtor. However this doctrine
could be reversed upon establishing material evidence that the debt or the obligation
still exists.
● In cases of joint creditors and debtors, only the part of the creditor who has given
remission in favor of the debtor shall be extinguished. In the same manner, only the
debtor who has been the beneficiary of remission will be exempted from the
obligation.Further, in cases of Solidary obligation, even if the instrument of credit is found
in the possession of even one debtor, the whole obligation is extinguished.

Art. 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)
● The accessory obligation is extinguished once the principal debt is remitted, because the
existence of the accessory obligation is dependent upon the existence of the principal
obligation.
● if the accessory obligation alone is extinguished, the principal obligation remains,
because the existence of the principal obligation is not dependent upon the accessory
obligation.

Art. 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)
● Pledge - ​a contract by virtue of which the debtor delivers to the creditor or to a
third person a movable, or document 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 all its fruits and accessions.
● If the pledge was found in the possession of the debtor, or of the third person who owns
the thing, the presumption is that the pledge, as an accessory obligation, has been
remitted. However, this presumption can be rebutted by the creditor if he proves that the
thing is stolen, returned for repairs, etc., in which case, there shall be no remission.
● Remission - an act of liberty, by virtue of which the obligee, without receiving any price
or equivalent renounces the enforcement of the obligation, as a result of which it is
extinguished in its entirety or in that part or aspect of the same to which the remission
refers. Simply put, it is the gratuitous abandonment by the creditor of his right.
Condonation or Remission of the Due ​(Articles 1270-1274)
● Condonation or remission is an act of liberality by virtue of which, without receiving any
equivalent, the creditor renounces enforcement of an obligation which is extinguished in
whole or in part.
● Requisites
1. The debt must be existing
■ You can remit a debt even before it is due.
■ Example: I owe A P1M. I promised to pay on July 31, 2002 with interest.
On May 31, A condones the obligation. The obligation is existing but not
yet due but it can be condoned.
2. The renunciation must be gratuitous
■ If renunciation is for a consideration, the mode of extinguishment may be
something else. It may be novation, compromise or dacion en pago for
example.
3. There must be acceptance by the debtor
4. The parties must have capacity
■ The creditor must have capacity to give away.
■ The debtor must have capacity to accept.
● Form
A. If the renunciation is express, then it is a donation.
■ The form of donation must be observed. If the condonation involves
movables, apply Article 748. If it involves immovables, apply Article 749.
B. If the renunciation is implied, then it is tantamount to a waiver.
■ There is no prescribed form in a waiver (Article 6*). For example, the
creditor can just refuse to collect the debt.
■ 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 providing that
the delivery of the document was made in virtue of payment of the
debt (Article 1271).
○ Article 1271 has no application to public documents because there
is always a copy in the archives which can be used to prove the
credit. Private document refers to the original in order for Article
1271 to apply.
○ By delivering the private document, the creditor deprives himself
of proof.
○ The second paragraph of Article 1271 implies that the voluntary
return of the title of credit is presumed to be by reason of
remission and not by reason of the payment of debt.
 ■ Whenever the private document in which the debt appears is found in the
possession of the debtor, it shall be presumed that the creditor delivered it
voluntarily, unless the contrary is proved (Article 1272).
■ 2 Presumptions:
i. If a private document is found in the possession of the debtor,
then it is presumed that the creditor voluntarily delivered it to him.
ii. Since the creditor voluntarily delivered the private document, then
there is a presumption of remission
● Ways of Remission
A. By will
B. By agreement
● Effect of Partial Remission
1. The renunciation of the principal debt shall extinguish the accessory obligations;
but the waiver of the latter shall leave the former in force (Article 1273).
■ Example: Loan secured by a mortgage. If I condone the loan, I condone
the mortgage. But if I condone the mortgage, I do not condone the loan
which merely becomes unsecured.
2. The obligation of the guarantor is extinguished at the same time as that of the
debtor, and for the same causes as all other obligations (Article 2076).
3. The guarantors, even though they be solidary, are released from their obligation
whenever by some act of the creditor they cannot be subrogated to the rights,
mortgages, and preferences of the latter (Article 2080).
4. 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 (Article 1274).
■ This presumption is not applicable in a mortgage since there is no
possessory lien.
5. In addition to the requisites prescribed in article 2085, it is necessary, in order to
constitute the contract of pledge, that the thing pledged be placed in the
possession of the creditor, or of a third person by common agreement (Article
2093)
6. The debtor cannot ask for the return of the thing pledged against the will of the
creditor, unless and until he has paid the debt and its interest, with expenses in a
proper case (Article 2105).

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. (1192a)
● Basis for confusion or Merger. If one who is a debtor is his own creditor, enforcement
of the obligation becomes absurd, since one cannot claim payment against himself.
Hence, the obligation is extinguished.
 ● Requisites of Confusion or Merger of Rights - ​In order that confusion may take place
resulting in the extinguishment of the obligation. The following requisites must concur:
○ That the characters of creditor and debtor must be in the same person;
○ That it must take place in the person of either the principal creditor or the
principal debtor;
○ That it must be complete and definite.

Art. 1276
Merger which takes place in the person of the principal debtor or creditor benefits the
guarantors. Confusion which takes place in the person of any of the latter does not extinguish
the obligation. (1193)
● Two kinds of merger:
○ Merger in the person of the principal or principal creditor
○ Merger in the person of the guarantor
● The first merger results in the extinguishments of the guaranty because the latter is just
an accessory obligation. When the principal obligation is extinguished, the accessory
obligation is also extinguished. Thus, the law says, the confusion benefits the guarantor
● The second merger will not extinguish the principal obligation because the efficacy of the
principal obligation is not dependent upon the accessory obligation

Art. 1277
Confusion does not extinguish a joint obligation except as regards the share corresponding to
the creditor or debtor in whom the two characters concur. (1194)
● Joint Obligation, concept; Distinguished from Solidary obligation
● In Joint obligation there are two or more debtors or creditors, where debtor is liable for a
proportion of debt and creditor is entitled to a part of a credit

Confusion ​(Articles 1275-1277)

● Confusion is the meeting in one person of the qualities of the creditor and debtor with
respect to the same obligation.
● Confusion or merger of rights extinguishes the obligation because the creditor becomes
his own debtor. Therefore, how can the creditor sue himself.
● Requisites of Confusion
1. It must take place between the creditor and the principal debtor (Article 1276)
■ A borrowed P 1M from B with C as guarantor. If C acquires the right to
collect the P 1M, there is no confusion since C is neither a principal
debtor or creditor. The effect is that the guaranty is extinguished. The
principal obligation remains.
2. The very same obligation must be involved (Article 1275)
● Usual Causes of Confusion
a. Succession (compulsory, testate, intestate)
b. Donation
 c. Negotiation of a negotiable instrument
● Confusion can overlap with remission or payment.
○ Example: X owes O P100,000. O bequeath to X that credit. And then she died. In
this case, there is extinguishment both by merger. But in this case, merger could
overlap with remission. Example of confusion overlapping with payment. A
makes a promissory note and endorses it to B. B endorsed it to C. C to D. D
endorsed it back to A.

SECTION 5 - Compensation

Art. 1278
Compensation shall take place when two persons, in their own right, are creditors and debtors
of each other. (1195)
● Compensation is a mode of extinguishing to the concurrent amount, the obligations of
those persons who in their own right are reciprocally debtors and creditors of each other.
● It is the offsetting of two obligations which are reciprocally extinguished if they are of
equal value or extinguished to the concurrent amount if of different values.

Kinds of Compensation:
● As to their effects
➔ compensation may be total (when the two obligations are of the same amount);
or
➔ partial (when the amounts are not equal).
● As to origin
1. Legal
○ It is legal when it takes place by operation of law because all requisites
are present.
2. Facultative
○ It is facultative when it can be claimed by one of the parties, who,
however, has the right to object to it, such as when one of the obligations
has a period for the benefit of one party alone and who renounces that
period so as to make the obligation due.
3. Conventional
○ It is conventional when the parties agree to compensate their mutual
obligations even if some requisite is lacking.
4. Judicial
○ It is judicial when decreed by the court in a case where there is a
counterclaim.

Compensation vs. Payment: In compensation, there can be partial extinguishment of

the obligation; in payment, the performance must be completer, unless waived by the
creditor. Payment involves delivery of action, while compensation (legal compensation) takes
place by operation of law without simultaneous delivery.
Compensation vs. Merger: In compensation, there are at least two persons who stand as
principal creditors and debtor of each other, in merger, there is only one person involved in
whom the characters of creditor and debtor are merged. In merger, there is only one obligation,
while in compensation, there are two obligations involved.

Art. 1279
In order that compensation may be proper, it is necessary:

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

(2) That both debts consist in a sum of money, or if the things due are consumable, they be of
the same kind, and also of the same quality if the latter has been stated;

(3) That the two debts be due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor. (1196)
● For compensation to take place, the parties must be mutually debtors and creditors (1) in
their own right, and (2) as principals. Where there is no relationship of mutual creditors
and debtors, there can be no compensation. Because the 1st requirement that the
parties be mutually debtors and creditors in their own right, there can be no
compensation when one party is occupying a representative capacity, such as a
guardian or an administrator. The 2nd requirement is that the parties should be mutually
debtors and creditors as principals. This means that there can be no compensation when
one party is a principal creditor in one obligation but is only a surety or guarantor in the
other.
● The things due in both obligations must be fungible, or things which can be substituted
for each other.
● Both debts must be due to permit compensation.
● Demandable means that the debts are enforceable in court, there being no apparent
defenses inherent in them. The obligations must be civil obligations, including those that
are purely natural. An obligation is not demandable, therefore,
● and not subject to compensation, in the following cases: (1) when there is a period which
has not yet arrived, including the cases when one party is in a state of suspension of
payments; (2) when there is a suspensive condition that has not yet happened; (3) when
the obligation cannot be sued upon, as in natural obligation.
● A debt is liquidated when its existence and amount is determined. Compensation can
only take place between certain and liquidated debts.
* The ​five requisites of a legal compensation are enumerated in the Article. All
requisites must be present before compensation can be effectual.

1. That each of the obligors be bound principally and that he be at the same time a
principal creditor of the other. The parties must be mutual creditor and debtor of each
other and their relationship is a principal one, that is, they are principal debtor and
creditor of each other.
2. That both debts consist in such 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.
When the debts consist of money, there is not much of a problem when it comes to
compensation to the concurrent amount. It is a matter of mathematical computation.
When the debt consist of things, it is necessary that the things are consumable which
must be understood as ‘fungible’ and therefore susceptible of substitution. More than
that they must be of the same kind. If the quality has been states, the things must be of
the same quality.
3. That the two debts are due. >> A debt is ‘due’ when its period of performance has
arrived. If it is a subject to a condition, the condition must have already been fulfilled.
However, in voluntary compensation, the parties may agree upon the compensation of
debts which are not yet due.
4. That they be liquidated and demandable. >> A debt is considered ‘liquidated’ when its
amount is clearly fixed. Of if it is not yet specially fixed, a simple mathematical
computation will determine its amount or value. It is ‘unliquidated’ when the amount is
not fixed because it is still subject to a dispute or to certain condition. It is not enough
that the debts be liquidated. It is also essential that the same be demandable. A debt is
demandable if it is not yet barred by prescription and it is not illegal or invalid.
5. That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor. >> A debt of a thing cannot be a
subject of compensation if the same had been subject of a garnishment of which the
debtor was timely notified. When a credit or property had been properly garnished of
attached, it cannot be disposed of without the approval of the court.

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)

● The liability of the guarantor is only subsidiary; it is accessory to the principal obligation
of the debtor. If the principal debtor has a credit against the creditor, which can be
compensated, it would mean the extinguishment of the guaranteed debt, either totally or
partially. This extinguishment benefits the guarantor, for he can be held liable only to the
same extent as the debtor.
Exception to the Rule On Compensation:
Right of Guarantor to Invoke Compensation Against Creditor. The general rule is that for
compensation to operate, the parties must be related reciprocally as principal creditors
and debtors of each other. Under the present Article, the guarantor is allowed to set up
compensation against the creditor.

Art. 1281
Compensation may be total or partial. When the two debts are of the same amount, there is a
total compensation. (n)
● Total Compensation ​— debts are of the same amount.
● Partial Compensation — Debts are not of the same amount; operative only up to the
concurrent amount.

Art. 1282
The parties may agree upon the compensation of debts which are not yet due. (n)
● Voluntary compensation is not limited to obligations which are not yet due. The parties
may compensate by agreement any obligations, in which the objective requisites
provided for legal compensation are not present. It is necessary, however, that the
parties should have the capacity to dispose of the credits which they compensate,
because the extinguishment of the obligations in this case arises from their wills and not
from law.

Art. 1283
If one of the parties to a suit over an obligation has a claim for damages against the other, the
former may set it off by proving his right to said damages and the amount thereof. (n)
● Although a rescissible or voidable debt can be compensated before it is rescinded or
annulled, the moment it is rescinded or annulled, the decree of rescission or annulment
is retroactive, and the compensation must be considered as cancelled. Recission of
annulment requires mutual restitution; the party whose obligation is annulled or
rescinded can thus recover to the extent that his credit was extinguished by the
compensation, because to that extent he is deemed to have made a payment.

Art. 1284
When one or both debts are rescissible or voidable, they may be compensated against each
other before they are judicially rescinded or avoided. (n)
● Assignment after Compensation​:
When compensation has already taken place before the assignment, inasmuch as it
takes place ipso jure, there has already been an extinguishment of one of the other of
the obligations. A subsequent assignment of an extinguished obligation cannot produce
any effect against the debtor. The only exception to this rule is when the debtor consents
to the assignment of the credit; his consent constitutes a waiver of the compensation,
unless at the time he gives consent, he informs the assignor that he reserved his right to
the compensation.
 ● Assignment before compensation​:
The assignment may be made before compensation has taken place, either because at
the time of assignment one of the debts is not yet due or liquidated, or because of some
other cause which impedes the compensation. As far as the debtor is concerned, the
assignment does not take effect except from the time he is notified thereof. If the notice
of assignment is simultaneous to the transfer, he can set up compensation of debts prior
to the assignment. If notice was given to him before the assignment, this takes effect at
the time of the assignment; therefore the same rule applies. If he consents to the
assignment, he waives compensation even of debts already due, unless he makes a
reservation.
● But if the debtor was notified of the assignment, but he did not consent, and the
credit assigned to a third person matures after that which pertains to the debtor, the
latter may set up compensation when the assignee attempts to enforce the assigned
credit, provided that the credit of the debtor became due before the assignment. But
if the assigned credit matures earlier than that of the debtor, the assignee may
immediately enforce it, and the debtor cannot set up compensation, because the credit is
not yet due.
● If the debtor did not have knowledge of the assignment, he may set up by way of
compensation all credits maturing before he is notified thereof. Hence, if the assignment
is concealed, and the assignor still contracts new obligation in favor of the debtor, such
obligation maturing before the latter learns of the assignment will still be allowable by
way of compensation. The assignee in such case would have a personal action against
the assignor.

Art. 1285
The debtor who has consented to the assignment of rights made by a creditor in favor of a third
person, cannot set up against the assignee the compensation which would pertain to him
against the assignor, unless the assignor was notified by the debtor at the time he gave his
consent, that he reserved his right to the compensation.

If the creditor communicated the cession to him but the debtor did not consent thereto, the latter
may set up the compensation of debts previous to the cession, but not of subsequent ones.

If the assignment is made without the knowledge of the debtor, he may set up the compensation
of all credits prior to the same and also later ones until he had knowledge of the assignment.
(1198a)
● This article applies to legal compensation and not to voluntary compensation.

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)
 ● The prohibition of compensation when one of the debts arises from a depositum (a
contract by virtue of which a person [depositary] receives personal property belonging to
another [depositor], with the obligation of safely keeping it and returning the same) or
commodatum (a gratuitous contract by virtue of which one of the parties delivers to the
other a non-consumable personal property so that the latter may use it for a certain time
and return it) is based on justice. A deposit of commodatum is given on the basis of
confidence in the depositary of the borrower. It is therefore, a matter of morality, the
depositary or borrower performs his obligation.
● With respect to future support, to allow its extinguishment by compensation would defeat
its exemption from attachment and execution, and may expose the recipient to misery
and starvation. Common humanity and public policy forbid this consequence. Support
under this provision should be understood, not only referring to legal support, to include
all right which have for their purpose the subsistence of the debtor, such as pensions
and gratuities.

Art. 1287
Compensation shall not be proper when one of the debts arises from a depositum or from the
obligations of a depositary or of a bailee in commodatum.

Neither can compensation be set up against a creditor who has a claim for support due by
gratuitous title, without prejudice to the provisions of paragraph 2 of Article 301. (1200a)
● Situations where compensation is not allowed by law
1. Where one the debts arises from a depositum – A deposit is constituted from the
moment a person receives a thing belonging to another with the obligation of
safety keeping it and returning the same (Art 1962)
○ Article 1287 uses the ‘depositum’ instead of ‘deposit’ which is used for an
ordinary bank deposit. A bank deposit is not a depositum as defined
above. It is really a loan which creates the relationship of debtor and
creditor. A bank’s failure to honor a deposit of money is failure to pay its
obligation as debtor and not a breach of trust arising from depositary’s
failure to return the thing deposited.
2. Where one of the debts arises from a commadatum (is a gratuitous contract
whereby of the parties delivers to another something not consumable so that the
latter may use for a certain time and return it. Art. 1933)
3. Where one of the debt arises from a claim for support due by gratuitous title. –
Support comprises everything that is indispensable for sustenance, dwelling,
clothing, medical attendance, education and transportation, in keeping with the
financial capacity of the family (Art. 194, family Code)
4. Where one of the debts consists in civil liability arising from a penal offense – If
one of the debts consist in civil liability arising from a criminal offense,
compensation would be improper and inadvisable because the satisfaction of
such obligation is imperative. (Report of the Code Commission, p. 134)
Art. 1288
Neither shall there be compensation if one of the debts consists in civil liability arising from a
penal offense. (n)
● Compensation of debt arising from penal offense is improper and inadvisable because
the satisfaction of such obligation is imperative.
● The person with civil liability (Offender) arising from crime is the only party who cannot
set up the compensation.
● The offended party who is entitled to indemnity can set up his claim in compensation of
his debt.
○ Example: D owes C P10,000.00. C stole the ring of D worth P10,000.00. Here,
Compensation by C is not proper. But D, the offended party, can claim the right
of compensation. The prohibition in Article 1288 pertains only to the accused but
not to the victim of the crime.

Art. 1289
If a person should have against him several debts which are susceptible of compensation, the
rules on the application of payments shall apply to the order of the compensation. (1201)
● Article 1289 is applicable to a debtor who have several debts to one creditor, and vice
versa. Under such circumstances, Articles 1252 to 1254 (on 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. (1202a)
● This provision talks about the moment compensation takes effect in legal compensation.
In contrast to voluntary compensation where compensation takes effect from the time
agreed upon by the parties, or judicial compensation where compensation takes effect
from the moment judgement becomes final and executory, legal compensation takes
effect only when the following requisites are present:
1. Each one of the obligors are bound principally, and that the obligors are at the
same time creditors of each other.
2. Both debts consists in a sum of money, or if the things due are consumable, they
are of the same kind, and also of the same quality if the latter has been stated.
3. That both debts are due.
4. That both debts are liquidated and demandable.
5. That both debts are not subject retention or controversy commenced by third
parties and communicated in due time to the debtor.
Compensation ​(Articles 1278-1290)
● Compensation is a mode of extinguishing, to the concurrent amount, the obligations of
those persons who in their own right are reciprocally debtors and creditors of each other.
● Next to payment, compensation is the most common mode of extinguishing an
obligation.
● Compensation Distinguished from Confusion
○ In compensation, there are 2 parties and 2 debts, whereas in confusion, there are
2 debts and only 1 party.
● Kinds of Compensation
A. Legal (Article 1279)
■ Legal compensation takes place automatically by operation of law once
all the requisites under Article 1279 are present.
■ Requisites
○ The parties must be mutually debtors and creditors of each other
in their own right and as principals.
➢ There can be no compensation if 1 party occupies only a
representative capacity (i.e. agent). Likewise, there can be
no compensation if in one obligation, a party is a principal
obligor and in another obligation, he is a guarantor.
○ The things due must be fungible
➢ Article 1279 uses the word ―’consumable’. This is wrong.
The proper terminology is ―’fungible’ which refers to
things of the same kind which in payment can be
substituted for another.
○ The 2 debts must be due
○ The 2 debts must be liquidated and demandable
➢ Demandable means that the debts are enforceable in
court, there being no apparent defenses inherent in them.
The obligations must be civil obligations, excluding those
that are purely natural. Before a judicial decree of
rescission or annulment, a rescissible or voidable debt is
valid and demandable; hence, it can be compensated.
➢ A debt is liquidated when its existence and amount are
determined. And a debt is considered liquidated, not only
when it is expressed already in definite figures w/c do not
require verification, but also when the determination of the
exact amount depends only on a simple arithmetical
operation.
○ Neither of the debts must not be garnished vi. Compensation must
not be prohibited by law
➢ Articles 1287, 1288 and 1794 are examples of when legal
compensation is not allowed.
 ➢ Legal compensation is not allowed when there is
conventional or facultative compensation.
■ Effect of Legal Compensation
○ 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 (Article
1289)
○ 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 (Article 1290)
B. Facultative (Articles 1287, 1288)
■ Facultative compensation takes place when compensation is claimable by
only one of the parties but not of the other.
■ 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 (Article 1287)
■ The prohibition of compensation when one of the debts arises from a
depositum or commodatum is based on justice. A deposit is made or a
commodatum is given on the basis of confidence in the depositary or the
borrower. It is therefore, a matter of morality, that the depositary or the
borrower should in fact perform his obligation; otherwise, the trust or
confidence of the depositor or lender would be violated.
■ With respect to future support, to allow its extinguishments by
compensation would defeat its exemption from attachment and execution
(Article 205, Family Code) and may expose the recipient to misery and
starvation. However, support in arrears can be compensated.
■ The depositary cannot set up compensation w/ respect to the things
deposited to him. But the depositor can set up the compensation.
○ Example: A is a warehouseman. B deposits 1000 quedans of rice
with A. B also owes A 1000 kilos of rice. A cannot claim
compensation but B can set up compensation.
● Neither shall there be compensation if one of the debts consists in civil liability
arising from a penal offense (Article 1288)
■ If 1 of the debts consists in civil liability arising from a penal offense,
compensation would be improper and inadvisable because the
satisfaction of such obligation is imperative.
■ The person who has the civil liability arising from the crime cannot set up
compensation. However, the offended party is entitled to set up
compensation.
 C. Conventional or Contractual (Article 1282)
■ Contractual or conventional compensation takes place when parties
agree to set-off even if the requisites of legal compensation are not
present.
■ The parties may agree upon the compensation of debts which are not yet
due.
■ The parties may compensate by agreement any obligations, in w/c the
objective requisites provided for legal compensation are not present.
D. Judicial (Article 1283)
■ Judicial compensation is compensation decreed by the court in a case
where there is a counterclaim.
■ 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.
● Effect of Assignment (Article 1285)
Situation:

There are two credits – credit I and credit II. In credit I, A is the creditor and B is
the debtor. In credit II, B is the creditor and A is the debtor. A wants to assign
credit I to C. A cannot assign credit II since it is passive subjective novation. Can
B now invoke against C the compensation of credit II? It depends:

a. If the assignment is with the debtor‘s (B‘s) consent

○ Debtor cannot set up compensation at all unless the right is reserved.
b. If the assignment is with the debtor‘s (B‘s) knowledge but without consent
○ The debtor can set up compensation with a credit already existing at the time of
the assignment.
c. If the assignment is without the debtor‘s (B‘s) knowledge
○ Debtor can set up as compensation any credit existing at the time he acquired
knowledge even if it arose after the actual assignment.
 SECTION 6 - Novation

Art. 1291
Obligations may be modified by:
(1) Changing their object or principal conditions;

(2) Substituting the person of the debtor;

(3) Subrogating a third person in the rights of the creditor. (1203)

● Kinds of Novation
A. As to their essence:
1. Objective or Real novation – effected by changing the object or principal
conditions of the obligation.
2. Subjective or Personal novation – effected by:
a. Objective or Real novation – effected by changing the object or
principal conditions of the obligation.
b. Subjective or Personal novation – effected by:
i. Substituting the person of the debtor (passive novation) or
ii. Subrogating a third person to the rights of the creditor.
(active novation)
3. Mixed novation – arises when there is a combination of the objective and
subjective novations.
B. As to the form of their constitution:
1. Express- when the parties declared in unequivocal terms that the old
obligation is extinguished by the new obligation.
2. Implied – when there are no express declaration that the old obligation is
extinguished by the new one.
C. As to the extent of their effects:
1. Total or Extinctive – when the original obligation is completely
extinguished. There is no novation when the new contract is not between
the same parties as in the old contract.
a. Requisites of Extinctive Novation
i. The existence of a previous valid obligation
ii. The agreement of all the parties to the new contract
iii. The extinguishment of the old obligation or contract
iv. The validity of new one.
2. Partial or Modificatory – when the original obligation is not totally
extinguished but merely modified.
D. As to their origin:
1. Legal Novation – takes place by operation of law.
2. Conventional Novation – takes place by agreement of the parties.
 E. As to presence or absence of condition:
1. Pure – when the creation of new obligation is not subject to any condition.
2. Conditional – when the creation of new obligation is subject to a condition.

Art. 1292
In order that an obligation may be extinguished by another which substitute the same, it is
imperative that it be so declared in unequivocal terms, or that the old and the new obligations be
on every point incompatible with each other. (1204)
● Novation Not Presumed - When both parties did not execute a new contract, novation
will not exist. It is also noted that since novation is never presumed, a new executed
contract must establish that the old and new ones are incompatible in all points and that
the will to novate must be expressly agreed upon by both parties or any acts equivalent
to the former.
● Express Novation - Binding parties must declare in their new executed contract that
they agreed to extinguish the old one and that the former is on every point incompatible
with the latter.
● Implied Novation - For an implied novation to arise, it is essential that there is an
incompatibility between the preceding and subsequent contracts.
● Essential Changes - In order for an implied novation to be validated, there must be a
change in the object, the cause, or the principal conditions of the obligations.
● Accidental Changes - Modifications or alterations of secondary agreements in contracts
do not constitute novation.
● Determination of Change - In determining whether a new executed contract is sufficient
to bring about a novation, these are to be considered in each particular case: facts,
circumstances, distinction between a principal and an accidental condition, the nature of
the clause that is modified, the intention of the parties and the economic significance of
the modification.

Art. 1293
Novation which consists in substituting a new debtor in the place of the original one, may be
made even without the knowledge or against the will of the latter, but not without the consent of
the creditor. Payment by the new debtor gives him the rights mentioned in Articles 1236 and
1237. (1205a)
● Two kinds of substitution
1. Expromission – which, when a third person initially takes place the obligation
even without the consent or against the will of the original debtor but with the
consent of the creditor.
2. Delegacion - Is when the debtor offers and the creditor accept a third person to
take place for the satisfaction of the original debtors obligation. In this agreement
they are called as a Delegante (debtor), Delegatario(creditor) and Delegado (third
person).
● Release of the old debtor - The old debtor must be released from the obligation after
the substitution otherwise there is no novation, and the third person who assumed the
 obligation without the release becomes co-debtor or surety. Absence of agreement as to
solidarity will result in both the original and the new debtors being considered obligated
jointly.
○ The creditor may still enforce the obligation against the original debtor without the
release.
● Consent of the Creditor - ​To be able to change the debtors, CONSENT of the Creditor
whether expromission or in delegacion is an INDISPENSABLE REQUIREMENT. The
reason for this rule is that the substitution implies a waiver by the creditor of his credit
and it may be prejudicial to the creditor. The prejudice may take a form of delay in the
fulfillment of the obligation or non performance by the new debtor, by reason of his
financial inability or insolvency.
● Consent of the Debtors - Consent of the debtors in case of expromission is not
necessary, substitution may be made without his knowledge. In delegacion the old
debtor needs to consent for the substitution, with the reasoning that the initiative comes
from him. In both delagacion and expromission, the consent of the new debtor is
necessary because he is the one who will assume the obligation.

Art. 1294
If the substitution is without the knowledge or against the will of the debtor, the new debtor's
insolvency or non-fulfillment of the obligations shall not give rise to any liability on the part of the
original debtor. (n)
● Example: A loaned to B in the amount of 5 thousand pesos, C who is related to A by
affinity added a loan of 5 thousand without the knowledge and affirmation of A. The loan
of C to B should not affect the loan of A to B. It is C who is liable to B for his additional
loan of 5 thousand pesos.

Art. 1295
The insolvency of the new debtor, who has been proposed by the original debtor and accepted
by the creditor, shall not revive the action of the latter against the original obligor, except when
said insolvency was already existing and of public knowledge, or known to the debtor, when the
delegated his debt. (1206a)
● This article applies only to delegacion – where the substitution of the old debtor is upon
the proposal of the old debtor himself (delegante) and the proposal was accepted by the
new debtor (delegado) and the creditor (delegatario)
● 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.
● Exceptions
1. If the insolvency was already existing and is of public knowledge when the debt
was delegated to the new debtor
2. If the insolvency of the new debtor was already existing and known to the original
original debtor at the time of the delegation of the debt to the new debtor (Art
1295)
 ● Circumstances which do not give rise to Novation by Delegacion:
1. When the third person acted merely as surety or guarantor for the original debtor
2. When the third person is merely an agent of the debtor
3. When the new debtor merely agreed to assume a joint responsibility for the
obligation. The delegacion is only with the reference to the proportionate share

Art. 1296
When the principal obligation is extinguished in consequence of a novation, accessory
obligations may subsist only insofar as they may benefit third persons who did not give their
consent. (1207)
● Renunciation of Principal Obligation - The general rule is that when the principal
obligation is extinguished, the accessory obligation also is extinguished. (Art.1273)
● Exception
○ Accessory obligation may subsist only if the third person who did not give their
consent is benefited.
○ This article is specifically applicable to novation by substitution of debtors.

Art. 1297
If the new obligation is void, the original one shall subsist, unless the parties intended that the
former relation should be extinguished in any event. (n)
● Two-fold Purpose of Novation:
1. To extinguish an old obligation
2. To create a new one to substitute for the old one
● If the new obligation is void, there is no new obligation to supersede the old one.
● Exception
○ If there is an agreement between the parties that even if the new obligation is
invalid, the old obligation shall still be extinguished in any, event, then the said
obligation shall be extinguished. This is equivalent to waiver or remission of the
obligation.
● Effect of a new obligation which is merely voidable:
○ When the new obligation is voidable — meaning it remains to be valid and
binding until it is annulled, then the old obligation is novated. However, if the new
obligation is annulled, the old obligation shall subsist and the novation shall be
set aside.

Art. 1298
The novation is void if the original obligation was void, except when annulment may be claimed
only by the debtor or when ratification validates acts which are voidable. (1208a)
● If the old obligation is void, the new obligation shall also be void since a void contract or
obligation does not exist and it is not subject to ratification. If the obligation is voidable,
the new obligation is valid and binding upon the parties until it is annulled. Before it is
annulled, it can novate the old valid obligation.
● Prescribed debts can be the cause or consideration for a new obligation in novation.
Art. 1299
If the original obligation was subject to a suspensive or resolutory condition, the new obligation
shall be under the same condition, unless it is otherwise stipulated. (n)
● If the credit transferred to the new creditor is subject to a suspensive condition, the credit
cannot be collected until after the fulfillment of the said condition.

Art. 1300
Subrogation of a third person in the rights of the creditor is either legal or conventional. The
former is not presumed, except in cases expressly mentioned in this Code; the latter must be
clearly established in order that it may take effect. (1209a)
● Legal subrogation is not presumed except in the cases mentioned in the law. Voluntary
subrogation must be clearly established with sufficient evidence, otherwise, its existence
will not be sustained.

Art. 1301
Conventional subrogation of a third person requires the consent of the original parties and of the
third person. (n)

Art. 1302
It is presumed that there is legal subrogation:

(1) When a creditor pays another creditor who is preferred, even without the debtor's
knowledge;

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

(3) When, even without the knowledge of the debtor, a person interested in the fulfillment of the
obligation pays, without prejudice to the effects of confusion as to the latter's share. (1210a)
● Examples
1. When a creditor pays another creditor who is preferred.
■ A owes B P1,000.00 secured by the first mortgage on the land of A. A
also owes C P2,000.00. This debt is unsecured.
■ Under the law, B, who is a preferred creditor, has preference to payment
with respect to the land as against C who is merely an ordinary creditor.
2. When a third person without interest in the obligation pays with the approval of
the debtor.
■ A owes B P1,000.00. C pays B with the express or implied consent of A.
■ In this case, C will be subrogated in the rights of B.
3. When a third person with the interest in the obligation pays even without the
knowledge of the debtor.
 ■ Suppose in the same example, C is the guarantor of A. C is a person
interested in the fulfillment of the obligation of A as he would be benefited
by its extinguishment.
■ If C 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.

Art. 1303
Subrogation transfers to the persons subrogated the credit with all the rights thereto
appertaining, either against the debtor or against third person, be they guarantors or possessors
of mortgages, subject to stipulation in a conventional subrogation. (1212a)
● The effect of legal subrogation is to transfer to the new creditor the credit and all the
rights and actions that could have been exercised by the former creditor either against
the debtor or against the third person, be they guarantors or mortgagors.
● Simply stated, except only for the change in the person of the creditor, the obligation
subsists in all respects as before the novation.

Art. 1304
A creditor, to whom partial payment has been made, may exercise his right for the remainder,
and he shall be preferred to the person who has been subrogated in his place in virtue of the
partial payment of the same credit. (1213)

Novation ​(Articles - 1291-1304)

● Novation is the extinguishment of an obligation by the substitution or change of the
obligation by a subsequent one which extinguishes or modifies the first, either by
changing the object of principal conditions, or by substituting the person of the debtor, or
by subrogating a third person in the rights of the creditor.
● Novation is the most unusual mode of extinguishing an obligation. It is the only mode
whereby an obligation is extinguished and a new obligation is created to take its place.
The other modes of extinguishing an obligation are absolute in the sense that the
extinguishment of the obligation is total. Novation, on the other hand, is a relative mode
of extinguishing an obligation.
● A compromise is a form of novation. The difference is that a compromise has some
judicial participation. The effect of compromise is the same as novation.
● Classifications of Novation
A. Subjective or Personal Novation – change of one of the subjects
● Active subjective
○ This a change of creditor.
○ This is also known as subrogation.
○ 2 Kinds of Subrogation
1. Legal (Article 1302)
■ It is presumed that there is legal subrogation:
 a. When a creditor pays another creditor who
is preferred, even without the debtor's
knowledge
b. When a third person, not interested in the
obligation, pays with the express or tacit
approval of the debtor
c. 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
2. Conventional
■ Conventional subrogation of a third person requires
the consent of the original parties and of the third
person (Article 1301)
○ Effect of Subrogation
1. 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
(Article 1304)
2. 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 (Article 1303)
● Passive subjective
○ This is a change of debtor
○ Types of Passive Subjective
1. Expromission (Article 1293)
■ In expromission the changing of the debtor is not
upon the old debtor's initiative. It could be upon the
initiative of the creditor or of the new debtor.
■ This requires the consent of the creditor since the
changing of the debtor may prejudice him. This
requires the consent of the new debtor since he is
the one who will pay.
■ The consent of the old debtor is not required.
■ The intent of the parties must be to release the old
debtor. The release of the old debtor is absolute
even if it turns out that the new debtor is insolvent.
■ Cases of expromission are quite rare.
 2. Delegacion (Article 1295)
■ In delegacion the change is at the debtor‘s
initiative.
■ The consent of the old debtor (delegante), the new
debtor (delegado), and the creditor (delegatario)
are all required.
■ The intent of the parties must be to release the old
debtor. However, release of the old debtor is not
absolute. He may be held liable in the following
circumstances:
a. If the new debtor was already insolvent at
the time of the delegacion
b. Such insolvency was either known to the old
debtor or of public knowledge
B. Objective or Real Novation
● In objective novation there is a change in the object or in the principal
conditions.
● Novation by a change in the principal conditions is the most problematic
kind of novation because one has to determine whether or not the change
in the conditions is principal or merely incidental.
● If the amount of the debt is decreased, according the SC in Sandico vs.
Piguing, there is no novation. One can look at the decrease of the amount
as a partial remission.
● In Millar vs. CA, there is no novation if the terms of the payment are
changed. In this case, there was a change from lump sum to installment
payments.
● In Fua vs. Yap, not only was the amount reduced, mode of payment was
changed from single payment to installment. Finally, a mortgage was
constituted. The SC said in Fua vs. Yap that there was a novation.
Therefore, a mere change in the amount or mode of payment if taken
singly is not a novation. But taken together, there is a novation.
● In Inchausti vs. Yulo, the SC said that the mere extension of time is not a
novation for the period does affects only the performance and not the
creation of an obligation. In another case, the SC said that the shortening
of the period is a novation.
C. Mixed Novation
● Mixed is a combination of both subjective and objective novation.
● Requisites of Novation
1. There must be a previous valid obligation
○ 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 (Article 1298)
2. There must be an agreement of the parties to create the new obligation
 ○ 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 (Article 1299)
3. There must be an extinguishments of the old obligation
○ 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 (Article 1292)
4. The new obligation must be valid
○ 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 (Article 1297)
● Effect of Novation
○ Accessory obligations may subsist only insofar as they may benefit third persons
who did not give their consent, ex: stipulation pour autrui
○ GENERAL RULE: In a novation, the accessory obligation is extinguished.
○ EXCEPTION: In an active subjective novation, the guarantors, pledgors,
mortgagors are not released.
○ Under Article 1303, accessory obligations are not extinguished. So there is a
conflict? How do you resolve? According to commentators, Article 1303 is an
exception to Article 1296.
○ B owes K P1 M. M is a guarantor of B. B is substituted by U. B is released. M is
also released under Article 1296. M is released since he guarantees B‘s
performance and not B‘s. B might have a good credit standing but U may not. M
might be prejudiced if he has to guarantee U‘s performance.
○ If there is a change in the creditor under Article 1303, the guarantor is not
released since it doesn‘t make a difference. What the guarantor guarantees is the
integrity of the debtor.
 Title II. - CONTRACTS

CHAPTER 1
GENERAL PROVISIONS

Art. 1305
A contract is a meeting of minds between two persons whereby one binds himself, with respect
to the other, to give something or to render some service. (1254a)

Art. 1306
The contracting parties may establish such stipulations, clauses, terms and conditions as they
may deem convenient, provided they are not contrary to law, morals, good customs, public
order, or public policy. (1255a)

Art. 1307
Innominate contracts shall be regulated by the stipulations of the parties, by the provisions of
Titles I and II of this Book, by the rules governing the most analogous nominate contracts, and
by the customs of the place. (n)

Art. 1308
The contract must bind both contracting parties; its validity or compliance cannot be left to the
will of one of them. (1256a)

Art. 1309
The determination of the performance may be left to a third person, whose decision shall not be
binding until it has been made known to both contracting parties. (n)

Art. 1310
The determination shall not be obligatory if it is evidently inequitable. In such case, the courts
shall decide what is equitable under the circumstances. (n)

Art. 1311
Contracts take effect only between the parties, their assigns and heirs, except in case where the
rights and obligations arising from the contract are not transmissible by their nature, or by
stipulation or by provision of law. The heir is not liable beyond the value of the property he
received from the decedent.

If a contract should contain some stipulation in favor of a third person, he may demand its
fulfillment provided he communicated his acceptance to the obligor before its revocation. A
mere incidental benefit or interest of a person is not sufficient. The contracting parties must
have clearly and deliberately conferred a favor upon a third person. (1257a)
Art. 1312
In contracts creating real rights, third persons who come into possession of the object of the
contract are bound thereby, subject to the provisions of the Mortgage Law and the Land
Registration Laws. (n)

Art. 1313
Creditors are protected in cases of contracts intended to defraud them. (n)

Art. 1314
Any third person who induces another to violate his contract shall be liable for damages to the
other contracting party. (n)

Art. 1315
Contracts are perfected by mere consent, and from that moment the parties are bound not only
to the fulfillment of what has been expressly stipulated but also to all the consequences which,
according to their nature, may be in keeping with good faith, usage and law. (1258)

Art. 1316
Real contracts, such as deposit, pledge and Commodatum, are not perfected until the delivery
of the object of the obligation. (n)

Art. 1317
No one may contract in the name of another without being authorized by the latter, or unless he
has by law a right to represent him.

A contract entered into in the name of another by one who has no authority or legal
representation, or who has acted beyond his powers, shall be unenforceable, unless it is
ratified, expressly or impliedly, by the person on whose behalf it has been executed, before it is
revoked by the other contracting party. (1259a)

General Provisions of Contracts ​(Articles 1305-1317)

● Definition
○ (Art. 1305) A contract is a meeting of the minds between 2 persons whereby one
binds himself, with respect to the other, to give something or to render some
service.
■ The definition in Article 1305 is inaccurate. The term ― ‘persons’ should
be submitted by the term ― ‘parties’.
■ Contracts may be multilateral; there can be more than 2 parties involved
(i.e. partnership).
● Characteristics of Contracts
A. Obligatory force (Art. 1315)
■ General Rule: Contracts are perfected by mere consent – the principle of
consensuality (Article 1315)
 ■ Exception: Real contracts, such as deposit, pledge, and commodatum are
not perfected until the delivery of the object of the obligation (Article 1316)
■ Obligations arising from contracts have the force of law between the
parties and should be complied with in good faith (Article 1159)
● Art. 1314. Any third person who induces another to violate his contract shall be
liable for damages to the other contracting party.
○ It is not clear whether Article 1314 is a tortious liability or a contractual
liability.
○ Article 1314 is really a quasi-delict.
○ Requisites
1. Existence of a valid contract
2. Knowledge by the 3rd person of the existence of the contract
3. Interference by the 3rd person in the contractual relation without
legal justification
A. Mutuality (Art. 1308-1310)
■ An example of a determination made by a 3rd person (Article 1309) is the
fixing of the price by the 3rd person.
■ The contract may be revoked if there is mutual dissent.
B. Relativity (Art. 1311)
■ General Rule: The contract is binding only upon the parties and their
successors (Article 1311). However, if the contract is purely personal
(intuitu personae), then the contract will not bind assigns and heirs.
■ Exception: 3 parties are affected by the contract in the following instances
and can take appropriate action
i. Accion pauliana (Article 1177)
○ An rescissory action involving a contract in fraud of
creditors. (Art. 1313)
ii. Accion directa
○ A direct (not subrogatory) action by the creditor against his
debtor‘s debtor, a remedy which gives the creditor the
prerogative to act in his own name, such as the actions of
the lessor against the sublessee (Article 1652), the laborer
of an independent contractor against the owner (Article
1729), the principal against the subagent (Article 1893),
and the vendor-a-retro against the transferee of the
vendee (Article 1608).
iii. Article 1312
○ In contracts creating real rights, third persons who come
into possession of the object of the contract are bound
thereby, subject to the provisions of the Mortgage Law and
the Land Registration Laws.
iv. Stipulation pour autrui
○ stipulation in favor of a 3rd person (Art. 1311, paragraph 2)
 ■ Requisites
1. There must be a stipulation in favor of a 3rd
person.
2. That stipulation in favor of a 3rd person
should be a part and not the whole of the
contract.
3. A clear and deliberate intent to confer a
benefit on a 3rd person and not merely
incidental.
4. That the favorable stipulation should not be
conditioned or compensated by any kind of
obligation whatsoever.
5. Neither of the contracting parties bears the
legal representation of authorization of the
3rd parties.
○ If the 3rd parties is represented, then
the principles of agency apply.
6. The 3rd person must have communicated
his acceptance to the obligor before its
revocation.
C. Autonomy of will (Art. 1306)
● Elements of a Contract
A. Essential Elements
■ Art. 1318. There is no contract unless the following requisites concur:
i. Consent of the contracting parties.
ii. Object certain which is the subject matter of the contract.
iii. Cause of the obligation which is established.
■ The essential elements are those without which there can be no contract.
These elements are, in turn, subdivided into common (communes),
special (especiales), and extraordinary (especialisimos). The common
elements are those which are present in all contracts, such as consent,
object certain, and cause. The special elements are present only in
certain contracts, such as delivery in real contracts or form in solemn
ones. The extraordinary elements are those which are peculiar to a
specific contract (i.e. price in sales).