Presentation by Stephen John Estonilo

Compensation &
Novation
Arellano University Business Law 2023
 Compensation
Compensation shall take place when two persons, in their own
tight; are creditors and debtors of each other. (Art 1278) It is a mode
of extinguishing obligations whereby two persons in their capacity as
principals are mutual debtors and creditors of cach other with
respect to equally liquidated and demandable obligations to which
no retention or controversy has been timely commenced and
communicated by third parties. (Union Bank of the Philippines vs.
Development Bank of the Philippines, G.R. No 191555, January 20,
2014).
 Compensation
Example: D owes C P5,000.00. C owes D
P5,000.00. Both debts are due and demandable.
The parties do not need to pay each other as their
obligations are extinguished by compensation.
Kinds of Compensation
1. As to amount or extent
a. Total: When the debts are of the same amount.
(Art. 1281)
b. Partial: When the debts are of different amount.
(Art. 1281)
Kinds of Compensation
2. As to cause or origin
a. Legal - This takes place by operation of law an
extinguishes both debts to the concurrent amount
(Art. 1279) even though the debts are payable at
different places (Art. 1286) and the creditors and
debtors are not aware of the compensation.
Kinds of Compensation
2. As to cause or origin
b. Voluntary or Conventional - This takes place
by agreement of the parties, such as when they
agree to the compensation of debts which are not
yet due. (Art. 1282)
 Novation
Novation is the modification or extinguishment of an obligation
by another, either by changing the object or principal condition,
substituting the person of the debtor, or subrogating a third person
in the rights of the creditor. (Art. 1291) Novation serves two
functions - one is to extinguish an existing obligation, the other to
substitute a new one in its place. (Starbright Sales Enterprises, Inc.
vs. Philippine Realty Corporetion, et. al., G.R. No. 177936, January
18, 2012)
 Novation
Example: D owes C P10,000.00. (1) If the parties later aft that
D should give instead a ring to C, there is novation by changing
the object or prestation. (2) If the parties agree that T shall take
the place of D as the new debtor, there is novation by substituting
the person of the debtor. (3) If the parties later agree that X shall
take the place of C as the new creditor, there is novation by
subrogating a third person in the rights of the creditor.