Republic Central Colleges

Law on Obligations and Contract

Module 7 – Extinguishment of Obligation (Part 1)
MODULE 7 – MODES OF EXTINGUISHING OBLIGATION
There is loss when
1. The thing perishes.
2. Goes out of commerce.
3. When it disappears in such a way that the existence is unknown or cannot be recovered.
Kinds of impossibility of performance.
1. Physical impossibility
2. Legal impossibility
3. Moral impossibility
Effects of loss
1. if specific or determinate the obligation is extinguished except:
a. If the debtor is at fault
b. When the debtor is liable, by provision of law, by contractual stipulation, or when the nature of the obligation requires
the assumption of risk.
2. If generic or indeterminate, the obligation is not extinguished under the principle genus never perishes. (genus nunquam
perit), except if it is a delimited generic thing.
Example: D obliged himself to deliver to C 100 cavans of C4 rice from his December harvest and such harvest was completely
destroyed by typhoon. The obligation of D is totally extinguished because the object is delimited generic thing
Examples of instances when obligation is not extinguished despite fortuitous event.
1. Article 1165, debtor is in default.
2. Article 1265, obligation arising from a crime.
3. When payee in solutio indebiti is in bad faith.
4. When the debtor promised to deliver the same thing to two or more persons who do not have the same interest.
5. When the nature of the obligation requires the assumption of risk
3. Obligation is to deliver a generic thing
4. When it is stipulated
Meaning of "Obligation is Extinguished".
If the thing is specific and it is lost due to fortuitous event the "obligation is extinguished". By this, we mean the obligation to deliver the
same thing is no longer possible because there is no more thing to deliver. Hence, if there is default on the part of the debtor, the
debtor's obligation to deliver the same thing is extinguished but the same is converted into monetary consideration for damages. The
same holds true if the debtor is at fault --- the obligation is converted into monetary consideration.
When is partial loss considered as a total loss.
The partial loss of the thing is considered as a total loss, when the loss is so material and the remaining portion of the object is
insignificant or immaterial.
Examples:
1. The loss of the body of a ball pen, what remains is the cover.
2. In marine insurance, when more than three fourths of the vessel are lost, it is considered a total loss, the insured may recover
the proceeds of the entire policy.
Example of Impossibility.
1. Legal— delivery of an object declared illegal by the law after the constitution of the obligation.
2. Physical—to repair the hull of a vessel lost in her voyage after perfection of the contract.
Illustrative Case: B bought a house and lot in a subdivision subject to the condition, annotated on the certificate of title, that they shall
be used for residential purposes only. Ten years later, B sold the property to X who converted it into a restaurant. The owner of the
subdivision demanded its closure but X refused, alleging that his lot has been reclassified by an ordinance as commercial and that it has
in fact became commercial because of its proximity to some stores and a shopping center in an adjoining subdivision. Is X's allegation
tenable?
Yes, the conversion of the land into commercial/ by ordinance is valued under the police power of the state. There is here a clear case
of impossibility of performance. The stipulation in the contract that it shall be used exclusively for residential purposes becomes futile
because the laws state under Article 1266, the debtor in obligation to do shall also be released when the prestation becomes legally or
physically impossible without the fault of the obligor.
Effects of loss in criminal offense.
If the thing proceeds from a criminal offense, the loss of such thing shall not extinguish the obligation unless the creditor is in default.
Example: D commits the crime of theft, and was asked to return the car stolen to the owner under the principle of restoration or
restitution of the property stolen. The night before delivery, the car got lost due to fire.
Question No. 1: Is D'S obligation extinguished?
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Law on Obligations and Contract
Module 7 – Extinguishment of Obligation (Part 1)
Answer: No, because the thing to be returned proceeded from a criminal offense, the loss of it shall not extinguish the obligation.
Question No. 2: Supposing on the date of delivery, D tendered delivery but C refused to accept. Subsequently, the car got lost due to
fire. Is the obligation to deliver extinguished?
Answer: Yes, because the creditor is in default, mora accipiendi
Question No. 3: If the creditor refused to accept, what must he (D) do?
Answer: D may either deposit the thing in court, that is consignation, or he may keep the thing in his possession
Remission or condonation defined.
It is the gratuitous abandonment by the creditor of his right. (Art. 1270)
Essential requisites of remission.
1. There must be an agreement.
2. The parties must be capacitated.
3. There must be a subject matter.
4. The cause or consideration is generosity.
5. Obligation is demandable at the time of remission.
6. Remission must not be inofficious.
Effect of the renunciation of the principal and/or accessory obligation.
If the principal obligation is remitted or renounced, the accessory will follow, but if it is the accessory which is remitted or renounced, the
principal shall subsist. (Art. 1271)
Effect of delivery of the thing pledged to the debtor by the creditor.
Contract of pledge is extinguished but not the principal obligation. Debtor is still indebted but there is no more security.
Illustrative Case: D owes C PI 0,000 payable on December 25, 2010, and as a security, D pledged his ring to C. Since this is a contract
of pledge, the ring was delivered to C, On the due date, the ring is found in the possession of D when it should be in the possession of
C. What is extinguished here is the contract of pledge, the principal obligation of PI 0,000 remains to subsist. In other words, D is still
indebted to C for PI 0,000, only this time, no more security.
Confusion or merger defined.
It is the meeting in one person of the qualities of creditor and debtor with respect to the same obligation. (Art.
1275) Requisites for a valid merger.
1. It must take place between the principal debtor and creditor.
2. The merger must be clear and definite.
3. Obligations are the same or identical.
Example: D obliges himself to pay C P 10,000 by virtue of a negotiable promissory note executed by D to C. C endorsed the note to X,
X to Y, Y to Z, and Z to D. D here, who is the principal debtor, becomes the creditor. The obligation of D is extinguished by merger or
confusion.
Effect of merger and confusion.
1. Obligation is extinguished.
2. If there is a guarantor and the mérger is in the principal debtor, the obligation is extinguished and the guarantor is released.
"Accessory follows the principal"
3. If there is a guarantor, and the merger is not on the principal debtor but only on the guarantor, the principal obligation is not
extinguished but the accessory is extinguished.
Confusion in joint and solidary obligations.
1. If the obligation is joint, only the share corresponding to the creditor or debtor in whom the two characters concur
Example: DI and D2 are jointly indebted to C for P 10,000. C endorsed the instrument to X, X to Y, endorsed back to DI only. In
here, the obligation of DI is extinguished and not D2. Instead, the right of DI is to proceed against D2 and collect P5,000.
2. If the obligation is solidary, the obligation is totally extinguished.
Example: DI and D2 are solidarity liable to C for P 10,000. C endorsed to X, X to Y, Y endorsed back to DI. The obligation here
is totally extinguished but DI's right is to proceed against D2 and collect P5,000. Compensation defined.
It is the extinguishment to the concurrent amount of the debts of two persons who, in their own rights are debtors and creditors
of each other. Manresa defines compensation as a sort of balancing two obligations simultaneously in or to extinguish them to
the extent in which the amount of one is covered by the other.
This compensation is sometimes called abbreviated or simplified payment, because the two debts are extinguished without the
transfer of money or property from one party to the other.
Compensation distinguished from payment.

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Law on Obligations and Contract
Module 7 – Extinguishment of Obligation (Part 1)
1. In compensation, partial payment is always permitted; while in payment, it must be complete and indivisible as a rule. 2. In
compensation, the mode may take place by operation of law; while in payment, it involves action or delivery of the amount paid.
Compensation distinguished from merger.
1. In compensation, there must be two persons who are mutually creditor and debtor to each other; while in merger or
confusion, there is only one person in whom is merged the qualities of creditor and debtor.
2. In compensation, there must be two persons involved; while in confusion, there can be only one person.
Distinguish set-off or counterclaim from compensation.
A set-off or counterclaim must be pleaded to be effectual whereas compensation takes place by mere operation of law and
extinguishes the two debts reciprocally.
What are the kinds of compensation?
1) As to their effects:
a) Total —same amount
b) Partial— not equal
2) As to origin:
a) Legal —operation of law
b) Facultative —one party can claim compensation the other cannot
c) Conventional — by agreement of the parties
d) Judicial—decreed by the court, in case where there is counterclaim
Legal compensation or operation of law.
The requisites mentioned apply to compensation by operation of law. Even if there is no agreement voluntarily and validly entered
into, there is compensation by operation of law.
Requisites of legal compensation exemplified.
1. That each of the obligors be bound principally, and that he be at the same time a principal creditor of the other Example: D owes
C, guaranteed by G. In another obligation, C owes G. There is no compensation in this case because G is not a principal
debtor, he is only guarantor of the principal debtor.
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
Example: Ten (10) sacks of rice cannot be compensated by ten (10) sacks of wheat because they are not of the same
kind. 3. That the two debts are due.
Example: D owes C PI 0,000 due on June 30, while C owes D P 10,000 due on June 15. On June 15, is there compensation?
None, under legal compensation, because one of the debts is not yet due.
4. That they be liquidated and demandable
Example: D owes C PI 0,000 due on June 30. In another obligation C owes D a profit to be realized on their business venture
in the month of June. On June 30 there can be no compensation because one of the debts is unliquidated 5. That over neither of
the debts must there be any retention or controversy commenced by third person and communicated in due time to the debtor.
Example: D owes C P 10,000 and C also owes D P 10,000. However, X, a third person has filed a garnishment proceeding
against D'S credit because X claims to be an unpaid creditor of D. In this case, there can be no compensation in the meantime
until the controversy is resolved. Be it noted that the controversy must be communicated to the debtor in due time.
Guarantor may set up compensation with respect to principal debt.
Example: D owes C PI 0,000 guaranteed by G. C owes D P8,000. On the due date, D is insolvent. How much is the liability of G?
Answer: G is liable for P2, 000 because the law states that the guarantor in an obligation may set up compensation as regards what the
creditor owes the principal debtor. (Art. 1280)
Illustrative Case: D owes C PI 0,000, X is the guarantor of D, In another obligation, C owes X PI 0,000. When C sues D for PI 0,000,
may D successfully put up the defense of compensation, after all C (his creditor) is indebted to X, his guarantor?
Answer: No, because X is not bound on his own right. Besides, D is not a creditor of C.
Rescissible or voidable debts can be compensated
In a contract where the debts are rescissible or voidable, the same may be compensated, provided they are not yet declared rescinded
or avoided. This is because rescissible and voidable debts are valid and binding until cancelled or declared void.
Assignment of the creditor’s right.
1. With the consent of the debtor
The debtor, lifts consented to the assignment of the creditor's right to a third pet son, cannot set against the assignee the
compensation which pertains to him against the assignor, unless he reserved his right to compensate.
2. With notice from the creditor hut without the debtor's consent. The debtor can set up against the assignee the compensation of
debts previous to the cession, but not of subsequent ones.
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Law on Obligations and Contract
 Module 7 – Extinguishment of Obligation (Part 1)
May the debtor, who has consented to the assignment of rights made by a creditor in favor of a third person, set up against the
assignee the compensation which would pertain to him against the assignor?
No, unless the assignor was notified by the debtor at the time he gave his consent that he reserved his right to the
compensation. When Legal Compensation cannot take place:
1. When one debt arises from a depositum in a contract
2. When one debt arises from the obligation of a bailee in commodatum
3. When one debt arises because of a claim for support
4. When one of the debt consists in civil liability arising from criminal offense.
Note: in No, 1, the relation of a depositor with a bank is considered a debtor-creditor relation, so the bank may set up
compensation. Novation defined.
It is the extinction of an obligation through the of a new one which substitutes the old one.
Obligation may be modified by:
1. Changing their object or principal condition.
2. Substituting the person of the debtor.
3. Subrogating a third person in the rights of the
Dual purpose of Novation.
1. Original obligation is extinguished.
2. Anew obligation is created.
Requisites of Novation:
1. Previous valid obligation.
2. Capacity and intention of the parties to modify or extinguish the obligation.
3. The modification or extinguishment of the obligation
4. The creation of a new, valid obligation.
Kinds of Novation
1. Personal — refers to the substitution of another in the person of the debtor or to the subrogation of a third person in the rights of
the creditor.
2. Real— refers to the change either in the cause, object or principal conditions of the obligation.
3. Mixed — refers to the combination of personal or real novation.
Change in period or term or time of payment.
a. If time of payment is shortened, say from years to 5 years, there is novation because the two obligations are incompatible with one
another.
b. If the payment is extended, say from 5 years to 10years, there is no novation because the two obligations are compatible to one
another, they can stand together. There is no essential change or alteration of the principal term of the original contract.
Expromission defined and exemplified.
That which takes place when a third person on his own initiative and without the knowledge or against the will of the original debtor
assumes the obligation.
Example: D owes C PI 0,000 due on December 25, 2009 X goes to C and assumed the obligation of D to C. C
consented. 1. Is D'S obligation to C extinguished? Yes, because C consented to the novation.
2. Supposing X becomes insolvent; can C proceed against D to collect the P 10,000? No, because in novation, the moment the
creditor consented to the novation, the obligation is totally extinguished.
Illustrative Case: D owes C P 10,000. X wrote C a letter stating that he would be the one to take care of D'S debt as soon as X had
made a shipment of logs to Japan. X never made such shipment. X did not pay C. Is X liable to C?
No, based on two counts:
1. There is no novation by expromission because C never consented to the offer of X. In order that the obligation will be
extinguished by expromission, the creditor must consent and that by agreement, the debtor will be released from his obligation. 2.
The offer made by X is subject to a suspensive condition. Since the condition was not fulfilled, the liability never became effective.
Delegacion defined and exemplified.
One which takes place when the creditor accepts a third person to take the place of the debtor at the instance of the latter.
The insolvency of the new debtor, who has been proposed 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 he delegated his debt. (Art. 1295)
Example: D owes C PI 0,000 due on December 25, 2009. Before the due date, D delegated his obligation to X, consented by C.
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Law on Obligations and Contract
Module 7 – Extinguishment of Obligation (Part 1)
 1. Is D'S obligation to C extinguished? Yes, because C consented to the novation.
2. Supposing X becomes insolvent, can C proceed against D to collect the P 10,000? No, except if at the time of delegation, D
knew that X is already insolvent orifit is ofpublic knowledge that X is insolvent because D here acted in bad faith.
Requisites of expromission and delegacion:
a. Expromission
1. Initiative of payment comes from the third person.
2. The consent of the creditor and new debtor is required.
3. The obligation of the old debtor is absolutely extinguished.
b. Delegacion
1. Initiative of payment comes from the debtor.
2. The original debtor, the creditor and the third person, or the new debtor must consent.
3. The obligation of the old debtor is generally extinguished.
May novation which consists in substituting a debtor in the place of the original one be made without the knowledge or against the will of
such debtor? What is the effect of the payment by the new debtor?
Yes, but the substitution must always be with the consent of the creditor. (AH. 1293) Payment by the new debtor entitles him to demand
from the original debtor what he has paid except that if he paid without the knowledge or against the will of the original debtor, he can
recover only insofar as the payment has been beneficial to the debtor and in such case, the new debtor cannot compel the creditor to
subrogate him in his (creditor's) right such as those arising from a mortgage, guaranty or penalty. (Att. 1237)
Effects of Novation on accessory obligation.
If the principal obligation is extinguished by novation the accessory obligation shall subsist only insofar as they may benefit third
persons who did not give their consent.
Example: D owes C P 10,000 with 14% interest. The interest of 14% should be given to X. Later, D and C agreed that instead of paying
C P 10,000, D will just give C a specific car. In here, D'S original obligation to pay C PI 0,000 is extinguished, but the 14% interest to be
given to X is not extinguished unless, of course, if X consented to the novation of D and C.
Effect of novation in void obligation.
If the original obligation is void, the novating contract is also void. If the novating contract is the one which is void, the original one shall
subsist.
Example: D obliged himself to give C a can of opium. Later D and C agreed that instead of a can of opium, D Will just give C P 10,000.
In here, there is no novation, there is no obligation to deliver the opium or to pay P 10,000 because original obligation is void or
inexistent, so there is nothing to change or to novate.
Effect of novation if Old obligation is voidable.
If the original is voidable only, a valid novation can take place because voidable contacts are valid until annulled by proper action in
court.
Example: C intimidated D to execute a promissory note for P 10,000 payable on June 15. However, after the intimidation had ceased,
and within four (4) years from the execution of the promissory note, D and C novated the contract, such that instead of giving C PI
0,000, he will just give C a specific horse. D'S obligation to give C a specific horse is valid because the first obligation is only voidable,
valid until annulled by action in court.
Effect if the new obligation is voidable.
If the new obligation is voidable, not void, the old one is extinguished and the new one shall be given force and effect until it is annulled.
Take note that voidable contracts are subject to ratification to give them a lasting effect.
Effect if the original obligation is subject to a condition,
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. (Art. 1299)
Example: D will give C a specific car if C will pass the May 2010 CPA examination. Later, D and C agreed that instead of D giving C a
specific car, he will just give a specific jeep.
However, they did not mention the condition in the Second contract. In this case, if C failed the examination, he cannot demand delivery
because the condition in the obligation is still in full force and effect.
Subrogation defined.
Manresa defines subrogation as the transfer to a third person of all the rights appertaining to the creditor, including the right to proceed
against the guarantor, possessors of mortgages, subject to any legal provision or any modification that may be agreed upon.
Subrogating a third person in the rights of the creditor may be:
1. Conventional subrogation — taking place by the agreement of the original creditor, the third person substituting the original
creditor and the debtor.
2. Legal subrogation — taking place by operation of law. Legal subrogation cannot be presumed, except in cases provided by law.

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Law on Obligations and Contract
 Module 7 – Extinguishment of Obligation (Part 1)
When is it presumed that there is legal subrogation?
1. When a creditor pays another creditor who is preferred even if without the debtor's knowledge.
2. When a third person not interested in the obligati0n pays with the express or tacit approval of the debt0f• 3. When, even without
the knowledge of the debt0r, a person interested in the fulfillment of the obligation pays' without prejudice to the effects of
confusion as to the latter's share.
Example of No. l: D owes Cl and C2. C 1, a mortgage creditor for P 10,000 and C2, an ordinary creditor for C2, without D's knowledge
paid D'S debt of PI 0,000 to Cl. Here, C2 wilt be subrogated to the rights of C1. C2 will be a mortgage creditor for P 10,000 and an
ordinary creditor for P5,000. If D cannot reimburse C2 of the P 10,000 paid to C1, C2 can have the property foreclosed because there is
legal subrogation.
Example of No. 2: D owes C P 10,000 due on December 25, 2009. X paid C PI 0,000 with the consent of D. Here, X is subrogated to
the right of C. So that if the debt is secured by a mortgaged property, X can foreclose the mortgage if D cannot reimburse X. However,
if X paid without the consent of D, he cannot foreclose the mortgaged property because there is no legal subrogation.
Example of No. 3: D owes C P 10,000 secured by a mortgage and guaranteed by G. If G paid C even without the knowledge of D, he
will be subrogated to all the rights of C because as a guarantor, he is interested in the payment of the obligation.
What are the effects of subrogation?
Subrogation transfers to the person subrogated the credit with all the rights appertaining thereto either against the debtor or against
third persons, be they guarantors or possessors of mortgages, subject to stipulation in a conventional subrogation.
Example: D owes C P 10,000; G is the guarantor. X paid C P I 0,000 with the consent of D and C. X is now subrogated in the place of
C, so that if D cannot pay X P 10,000 as reimbursement, X can proceed against the guarantor, G.
In the same example, it there is no guarantor, but there is properly mortgaged to C, if D cannot reimburse X, the right of X is to
foreclose the mortgaged property because D consented to the payment of X, there exists a legal subrogation.
Give at least two distinctions between conventional subrogation and assignment of rights.
1. In conventional subrogation, the original obligation is extinguished but another one is created while in assignment of right, there
is only a transfer of right or credit.
2. In conventional subrogation, the debtor's consent is required while in assignment of right, what is required is only a
notice. Subrogation incase partial payment is made.
As between the creditor and the third person who m; have been partially subrogated in the rights of the creditor, it is still the first creditor
who is preferred.
Example: D ow C PI 0,000. Before the due date of the obligation, a third person, X paid C P6,000 with the consent of D. D now has got
two creditors, C for the balance Of P4,OOO and X for P6,OOO. If D now has only P4,OOO to pay his obligation between C and X, who
is preferred?
Answer: C, because 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 the same credit.

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