OBLIGATIONS AND

CONTRACTS
LECTURE 10
By: Atty. Wilfred Francis B. Martinez
Compensation (pago abreviado)
Compensation
 It is a mode of extinguishing an obligation in their
concurrent amount those obligations of persons who, in
their own right, are creditor and debtors of each other.
 In other words, they cancel each other’s debts.
Compensation
 Requisites:
1. That each one parties are bound principally to each other as
debtor and creditor.
2. That both debts consist in a sum of money, or if the thing due is
a consumable, they be of the same kind, and of the same quality.
3. That the two debts are due and demandable.
4. That over neither of them, there be any retention or controversy,
commenced by a third person and communicated in due time to
the debtor.
5. The compensation must not be prohibited by law.
Compensation
 Example: (Full Compensation)
 Maria borrowed P10,000.00 from Pedro on 1 January 2018. Maria is
expected to pay back her loan on 31 December 2018.
 Pedro, on 1 September 2018, forgot to pay his electrical bill
amounting to P10,000.00. Because Pedro was in the USA, he could not
pay his bills so Maria paid the electric company.
 On 31 December 2018, Pedro returned to the Philippines and found
out that Maria already paid Pedro’s bills. Pedro agrees that he will no
longer be collecting the P10,000.00 loan payment from Maria, and
Maria agrees to no longer collect the P10,000.00 reimbursement for
the electricity bill.
Compensation
 Example: (Partial Compensation)
 Regine bought a car from Philip on 1 January 2018 for P500,000.00.
Regine promises to pay the full amount before 31 December 2018.
 On 1 September 2018, Philip goes to the appliance store owned by
Regine to buy a beautiful 50 inch LED TV worth P100,000.00. When
Philip tried to pay for the TV with his credit card, it was declined.
 Regine, after hearing of the problem, called Philip to tell him that he
can have the TV if Philip agrees to reduce Regine’s debt to only
P400,000.00. Philip agrees. On 31 December 2018, Philip only
demands and collects P400,000.00 from Regine, while Regine does not
collect Philip’s payment for the TV.
 In the example above, we see partial compensation of the debt.
Compensation
 Example of when compensation does not take place:
 Benito borrowed from Charles P10,000.00 payable in one year.
 While Charles was in Japan for business, Chad, the son of Charles,
approached Benito and borrowed P5,000.00 to pay for his tuition
fee. Benito gave the money to Chad, but Chad used the money to
buy a new cellphone.
 When it was time for Benito to pay his loan, Benito only paid
P5,000.00 to Charles. Benito claims that there is compensation
when he gave the money to Chad for his tuition fee.
 In the above example, Benito is not correct. There is no
compensation because the first requisite (mutual debtor and
creditor of each other) is not present.
 The answer will still be the same even if Chad used the money to
pay his tuition fee instead of buying a new cellphone.
Compensation
 The fourth requisite says “That over neither of them,
there be any retention or controversy, commenced by a
third person and communicated in due time to the
debtor.” what does this mean?
 This means that the money being used in the compensation must
not be subject to any claim by a third person.
 Example:
 Carla is renting an apartment owned by Juan, her monthly rate is
P1,000.00. Juan borrowed P1,000.00 from Carla payable within 1
month. Both agreed that compensation will take place.
 Before the agreed compensation can take place, Javier, the brother of
Juan, approached Carla and demanded that Carla pay the rent to him
because Javier says that he is the true owner of the apartment.
 In this case, compensation cannot take place until the ownership of
the apartment is resolved.
Compensation
 Can the creditor still assign his rights if the possibility of
compensation is present?
 It depends of the situation:
 If all of the requisites of compensation is already present, the creditor
cannot assign his rights to a third person because the obligation is
already extinguished. In other words, the creditor has nothing to
transfer.
 If one or more of the requisites are not yet present, the creditor may
assign his rights to a third person however, the creditor must notify
the debtor first.
Compensation
 Final notes on compensation.
 Compensation cannot take place where the obligation arose from a
criminal offense.
 Compensation cannot take place where the obligation arose from a
contract of depositum or commodatum.
 Certain obligations to the government like taxes and government
fees cannot be compensated.
 If there are multiple debts susceptible of compensation, the rules
on payment of multiple debts is applicable. (See Week 8 Slide 16)
 If all requisites for compensation are present, compensation
becomes automatic. The consent of the parties will no longer be
necessary.
Novation
Novation
 Novation is the change or modification or extinguishment
of an obligation by either changing the object or principal
conditions or substituting the person of the debtor, or
subrogating a third person in the rights of the creditor.
 Requisites:
1. There is a previous valid obligation;
2. The agreement of the parties to the new contract;
3. The extinguishment of the old contract/obligation; and
4. The validity of the new obligation.
Novation
 Change of the object of the obligation.
 Example:
 Andrew and William entered into a contract of service wherein
William is to construct a two-story house for Andrew.
 During the existence of the contract, Andrew discovered that he only
needed a one-story (bungalow) house. Both Andrew and William
agreed and thus William accordingly changed his building plans to a
bungalow instead of a two-story structure.
 In this case, Novation took place. The old contract (the one involving
the construction of a two-story house) is extinguished, however, a
new contract (construction of a bungalow) took its place.
Novation
 Change in the principal conditions of the contract.
 Example:
 Jero and Wena entered into a contract of sale whereby Jero will sell
his land to Wena for P1 Million pesos. Wena’s obligation is to pay the
amount once she receives her bonus salary as the manager of a
restaurant in the USA.
 Before Wena received her bonus however, the restaurant closed down
and she was forced to return to the Philippines. Aware the she can no
longer comply with her obligation to Jero, Wena proposes to pay the
amount once she receives her bonus from her new job as manager of
a five star hotel in the Philippines. Jero agrees.
 In this case, there was a change in the principal condition of the
contract, specifically, the period in which Wena is supposed to pay
Jero.
Novation
 Substituting the person of the debtor:
 Example:
 Miko and Larry entered into a contract of sale for a laptop owned by
Miko. In the agreement, Larry will pay Miko P10,000.00 for the laptop
within 2 months.
 Before the debt became due and demandable, Larry discovered that
he will be unable to pay his obligation to Miko. To prevent delay, Larry
approached Geoffrey and asked him to pay Miko. Geoffrey agreed this
he sent notice to Miko about the change in the debtor.
 In this case, Novation took place. The old contract (Larry paying Miko)
is extinguished, however, a new contract (Geoffrey paying Miko) took
its place.
Thank You.