Fariola, Lea Gabrielle M.

– M7
Obligations and Contracts

Assigned: Articles 1275 to 1282

SECTION 4: CONFUSION OR MERGER

Article 1275 – The obligation is extinguished from the time the characters of
creditor and debtor are merged in the same person.

Articles 1275 to 1277 talks about one of the Modes of Extinguishment of

Obligation enumerated in Article 1231 of the same Code. Confusion or merger happens
when the right of the creditor to compel payment or performance and the obligation of
the debtor to pay or comply with what is incumbent upon him are merged in one person.
This basically means that person is the creditor and debtor of himself.

Why will confusion extinguish the obligation?

Since the person is the creditor and debtor of himself, it will no longer make since
if he would still compel himself for payment or performance.

Also, if the purpose of the contracting parties is fulfillment of the obligation, it

would have been deemed complied with when the rights and obligations are embodied
by only one person.

Requisites:
1. Must take place between the principal debtor and creditor.
2. It must be complete and definite.

Real rights extinguished by confusion

Real rights like usufruct, mortgage pledge, right of repurchase, lease record,
servitude, etc. are extinguished by confusion if it is merged with ownership which is the
most comprehensive real right; such is called as consolidation of ownership. The
transmission of the title could be through assignment, subrogation, sale of inheritance,
etc.

Cases where confusion may take place:

1. Inheritance
a. If a daughter owes her mother 1,000 pesos and her mother dies leaving to
her the amount plus all the other things, there is confusion in the person of
the daughter.

b. M is the daughter of G and she filed for support from her father. When she
died her daughter D pursued the case against G. When G dies, since D is
also an heir of G, then there is confusion in the person of D.

c. Involving a real right.

When X and Y’s father died, he gave his parcel of land to X as
usufruct and the naked title to Y. When Y sold his interest to X, there is
confusion in the person of the latter.

What is extinguished here is the usufruct of X so he now has full

ownership of the land.

2. Indorsement or delivery of a negotiable instrument

 The indorsement of a negotiable instrument or the delivery of a bearer one
which is indorsed or delivered back to you would effect to confusion which would
extinguish the obligation.

3. Mortgage-creditor in a public auction

If a person has a mortgage credit over a property which is sold in a public
sale, he has rights to exact payment from the purchaser. So if a mortgage-
creditor purchases the same property in the public sale, then the obligation is
extinguished though confusion.

4. Loan with mortgaged land

If A borrowed from C mortgaging her land as security for the loan, when
she sells her land to C, the mortgage will be extinguished. However, the loan will
not be extinguished; it would still have to be paid.

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.

Since the first requisite in order for confusion to extinguish the obligation is that it
must take place between the primary creditor and debtor, then it does not extend to
guarantors who are secondary parties.

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.

If confusion involves more than one debtor, it has to be distinguished if the

obligation is a joint or solidary one. In an obligation with solidary debtors, there is only
one obligation; while with joint debtors, there are as many debts are there are debtors.

If the merger occurs to one of the solidary debtors, then the entire obligation is
extinguished. However, if the merger occurs to one of the joint debtors, the only debt
that is extinguished is only to the extent of that certain debtor since the debt of the other
debtors are considered to be separate and distinct.

SECTION 5: COMPENSATION

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

This section is one of the Modes of Extinguishment of Obligation mentioned in

Article 1231. In this situation, it would seem that the two debts balances out each other.
Meaning, the debt of one extinguishes to that extent the other owes to him.

Object of compensation
Here, debts are extinguished without the actual transfer of money between the
parties. Therefore, this mode is in order to avoid any unnecessary suits through mutual
extinction.

Kinds of compensation
a. As to effect or extent – which talks about the debt
1. Total – same amount
This one is thoroughly discussed in Article 1281
2. Partial – different amount
 b. As to cause or origin – takes place by
1. Legal – operation of law
This one is thoroughly discussed in the next Article

2. Voluntary or Conventional – agreement of parties

This one is thoroughly discussed in Article 1282
3. Judicial – order from a court in litigation
4. Facultative – only one of the parties

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 and the other;
2. That both debts consist in a sum of money, or if the things dues 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; and
5. That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the debtor.

Article 1279 talks about Legal Compensation which takes effect by operation of
law. This may take place:

- Even if the debts are payable at different places;

- Even if the parties are not aware of the compensation;
- Even if against the will of the interested parties; and
- Even if without the consent of the parties

From the time that all the requisites are met, the obligation is extinguished
because of compensation.

Requisite 1:
In the preceding section which talks about confusion, it is applicable only to
principal debtors and creditors.

As a General Rule, compensation shall also only be applicable if the obligors are
bound principally and that he be at the same time a principal creditor of the other. There
is, however, an Exception. A guarantor may set up compensation as regards what the
creditor may owe the principal debtor.

The exception is discussed thoroughly in the next Article.

Requisite 2:
In this requisite, “consumable” shall not be taken in its general sense. It may also
mean capable of being substituted. So in these cases, the things capable of being
substitute would construe generic things, since specific ones cannot be substituted.

Requisite 3:
Here, it is not required that the two debts have the same due dates. What is only
necessary for legal compensation to take place is that the maturity date of the debts
have arrived.

Requisite 4:
Liquidated
The amount of the debts has already been determined and, if not, can be easily
determinable.
Demandable
Both debts must be enforceable.
If any has prescribed, legal compensation can no longer take place.

Requisite 5:
Retention
When the credit of one of the parties is subject to the satisfaction of the claim of a
third person, while controversy exists when a third person claims he is the creditor of
one of the parties.

In due time
The period before legal compensation is supposed to take place.
A controversy that is communicated to the parties after the “time”, may no
longer undo the compensation that has taken place by operation of law.

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.

This article is an exception to the first requisite of legal compensation; that even if
the guarantor is only subsidiarily bound, he is given the right to set up compensation.

This is under the concept that the extinguish of the principal obligation carries
with it the extinguishment of the accessory.

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

If two debts do not have the same amounts, compensation is total as regards the
smaller debt, and partial only with respect to the latter debts.

Article 1282 – Compensation may be total or partial. When the two debts are of
the same amount, there is a total compensation.

This article is an exception to Requisite 4 of Article 1279 which talks about the
requisites for Legal Compensation. This takes place by agreement of the parties.

So even if the debts are not yet due and demandable, for as long as the parties
have agreed to the compensation of debts, then the obligation could be extinguished.

The requisites for voluntary compensation to take place are that each of the
parties has a right to dispose of the credit that he seeks to compensate and that they
agree to the mutual extinguishment of their credits.