Definition of Obligation: Juridical Necessity to give, to do or not to do.

Elements
1.) Active Subject – The creditor, has the right to court in case there is nonperformance.
2.) Passive Subject - The Debtor
3.) Object – Determinate, Useful, Lawful, Assessable in Money, Possible.
4.) Juridical Tie (Vinculum Juris) – Sanction, in case there is nonperformance you can go to court (enforceability)

Types of Obligation:
Obligations according to the peculiarities of the prestation
Concept: its existence or termination will be dependent upon the happening or non-fulfillment of an event.

A.) Pure Obligation - Demandable at once, not dependent upon an event.

B.) Obligation with a condition – Future and uncertain event; it may or may not happen
Example: I will give you a car if you pass the bar

Suspensive Condition – The happening of the event will give rise to the obligation.
Example: I will give you and award if you excel in school
Resolutory Condition – The happening of the event will extinguish the obligation
Example: You can drive my car, until you become 18
Potestative Condition – Fulfillment depends upon the will of one party; valid if will of creditor
Example: I will sell you my house when I come home to the Philippines
Purely potestative – fulfillment dependents solely on the will of the debtor; void. (Applicable only to suspensive)
Example: I will pay my debt when I feel like it
Causal Condition – fulfillment depends upon the will of a third person; valid
Example: I will give you my car when Marcos becomes president
Mixed Condition – Fulfillment depends upon the will of one of the parties and upon chance or will of third
person. Example: I will pay my debt when I house gets sold.
Impossible Conditions – contrary to good customs, public policy, prohibited by law; annul the obligation
Exception – If object is divisible, the part that is not impossible shall be valid.
Example: I will give you 30 kilos of shabu
Positive Condition – involves the performance of an act or the fulfillment of an event; extinguished if time
expires or when it is indubitable that it will not take place.
Example: I will give you my car if you pass the bar in one take.
Negative condition – involves nonperformance of an act.

Remedies to breach in Reciprocal Obligations (cannot seek both):

1.) Fulfillment plus damages
If chosen fulfillment and fulfillment becomes impossible can still chose rescission / resolution
2.) Rescission / Resolution plus damages

Must be invoked judicially by filing proper action for rescission

Exception: when contract itself contains a stipulation for rescission; judicial permission no longer necessary

Breach must be substantial and fundamental to warrant rescission or resolution.

 If both parties committed breach, the first infraction shall be liable, if cannot be determined which parties
violated first, each shall bear his own damages.
Loss or deterioration of improvement of a thing while condition or period is pending (To Give):

Loss:
Without fault of the part of the debtor – Extinguished (Specific) Substitution (Generic)
With fault – Damages

Deterioration:
Without fault of the debtor – Creditor will have to bare damages
With fault – Options (1) Recession plus damages (2) Fulfillment plus damages

Improvement:
Improved by nature: Benefit the creditor
Improved at the expense of the Debtor; rules of usufruct; removal of improvement.

C.) Obligation with a period – Future and certain event; no matter what it will happen
Example: I will give you my house if I die
Effect of Fortuitous Event: relieve the contracting parties from the fulfillment of their respective obligations
during the term or period.

Suspensive Period – The happening of a suspensive period will give rise to the demandability of the obligation
Example: Retirement benefits upon reaching retirable age
Resolutory Period – The happening of the event will extinguish the obligation
Example: I will give you this car if you promise not to marry Janice

Advanced payment or deliver: the obligor being unaware of the period or believing that the obligation has
become due and demandable, paid or delivered before the arrival or expiration period, he may recover what
he has paid or delivered with fruits and interest. (Applicable only in obligations to give)

Benefit of Term: If stipulated, presumed to be beneficial to both creditor and debtor.

General Rule: Creditor cannot demand performance, debtor cannot perform, before the expiration of period.
Exception: From the tenor of the obligation or other circumstances term is in favor of either creditor or debtor
only.

Courts can fix a duration of the term:

1.) No stipulation, but intention can be inferred.
2.) Depends on the will on the debtor
Once stipulated cannot be changed.

Debtor loses every right to make use of the period if:

1.) After obligation has contracted, he becomes insolvent, unless gives guaranty or security
2.) Does not furnish guaranty or security promised
 3.) By his own acts, impaired the guarantee or security, if fortuitous, must immediately give another equally
satisfactory.
4.) When he violates any undertaking in consideration to which the creditor agreed to the period.
5.) When he absconds (hides)

Loss or deterioration of improvement of a thing while condition or period is pending (To Give):

Loss:
Without fault of the part of the debtor – Extinguished (Specific) Substitution (Generic)
With fault – Damages

Deterioration:
Without fault of the debtor – Creditor will have to bare damages
With fault – Options (1) Recession plus damages (2) Fulfillment plus damages

Improvement:
Improved by nature: Benefit the creditor
Improved at the expense of the Debtor; rules of usufruct; removal of improvement.

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Obligation according to number of parties

Joint Obligation – Creditor can only compel each debtor to pay only his share of the obligation
No stipulation; presumption that the obligation is joint.
Credit or debt shall be presumed to be divided into as many equal shares as the creditors and debtors, each
considered distinct from one another.

General Rules:
Object is Indivisible – Can only be enforced if creditor proceeds against all debtors, Refusal of one debtor to
comply; Converted to indemnity to damage.
Insolvency – Others shall not be liable for one debtor’s insolvency
Condonation/Remission – Total Remission; all debtors are benefited. Partial Remission; refers only to the share
of the debtor benefited from remission.

Solidary Obligation – Creditor can compel one debtor to pay the whole obligation without prejudice to his
right to reimbursement from his co-debtors.

Cases where there can be solidary liability:

1.) Expressly stipulated
2.) Law – Parental Authority
 3.) Nature requires - obligations arising from criminal offenses

- Indivisibility itself does not necessarily give rise to solidarity, nor dies solidarity of itself imply indivisibility.
- Solidarity may exist although creditors & debtors may not be bound in the same matter, period and condition.
- Each solidary debtor may do whatever may be useful to the others but nothing to prejudice them as well.
Example. Debtor may demand performance or payment of entire obligation from one or all debtors.
If paid, the other solidary creditors will have the right to demand from the creditor their share.
- Art. 2015, the novation, compensation confusion or remission of the debt by one solidary creditor in the
extinguishment of the obligation is responsible for the share of the other creditors.
- Solidary creditor cannot assign his right without consent of other solidary creditors.
- Debtor may pay to any creditor except when one creditor has demanded in which case pay to him
- Creditor may proceed against any, some or all debtors simultaneously
- Payment made by one debtor extinguishes the obligation, if two debtor wish to pay, creditor may choose.
- He who made the payment may ask for reimbursement from fellow debtors with interests if payment made
after debt is due, otherwise, no interest.
- If by insolvency of one debtor, he cannot reimburse the payor/debtor, his share shall be borne by his co
debtors.

- No reimbursement if payment was made after obligation has prescribed or become illegal.
- Remission that affects only one debtor does not release him from responsibility should the debt be totally
paid by another debtor before the remission.
- Remission of whole obligation obtained by one debtor does not entitle him reimbursement from his co
debtors.
Thing lost, prestation has become impossible without fault of debtor; extinguished
If there was fault on any one of them, all shall be responsible for damages and interest plus action against
negligent debtor. Same if there is default on one debtor.

Defenses of a Solidary Debtor:

1.) Defense derived from the very nature of the obligation
2.) Defenses personal to him or pertaining to his own share
3.) Defenses personal to the others

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Obligation according to the number of prestations

1.) Individual prestation (one prestation)
2.) Multiple prestation

A.) Alternative Obligation – Several prestations due, fulfillment of one will extinguish.

- Loss of a prestation does not extinguish the obligation for as long as other prestations are available
- Creditor may not be compelled to receive part of one and part of other undertaking.
- Right of choice: Debtor Exception: stipulated
- Debtor has no right to choose stipulations that are impossible, unlawful, not part of the prestations
 - Choice has no effect unless communicated to creditor; when communicated, becomes bound to
choice. Cannot renounce.
- Debtor loses right of choice where when only one prestation can be performed.
- If there is bad faith on the part of the creditor, the debtor can rescind with damages

Choice of the Debtor:

Creditor has a right to damages when through the fault of the debtor, all things are lost or compliance
has become impossible.
Damages shall be fixed based on the value of the last thing lost or service which has become impossible.

Choice of the Creditor:

Upon the express notification of the choice to the Creditor, obligation ceases to be alternative and
governed by the following rules:

1.) One thing is lost through fortuitous event, deliver the choice of the creditor, or what remains
2.) Loss of thing though fault of debtor, claim any objet subsisting or price of what was lost plus
damages.
3.) All things are lost, fault of the debtor, creditor shall choose price of any one of them plus damages

B.) Facultative Obligation – One prestation due, debtor has the right to substitute what is due
Loss of substitute; turns the obligation to specific performance.

- Loss or deterioration of substitute does not render the obligor liable, but once substitution has been
made he is now liable for loss in the event of his delay, fraud or negligence.

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Specific Obligation (determinate)

Duties of an Obligor (To Give)
1.) Specific Performance (Art. 1165)
2.) Preserve the things (Art. 1163)
General Rule: Good father of the family
Exception: Stipulation or law (carriers: goods; extraordinary, passengers; utmost)
3.) Delivery of Accessions and Accessories the time the obligation to deliver arises (Art. 1166)
a.) Accession – a thing that if there is an attempt to remove, there is injury.
b.) Accessory – ornament, when removed, will not result to injury
Remedies to the Creditor in case of breach (To Give)
1.) Action for Specific Performance plus damages
2.) Action for Recession plus damages

Generic Obligation (indeterminate)

Duties of an Obligor (To Give)
1.) Delivery of the things of the same quality specified
Duties of an Obligor (To Do)
1.) Perform the act as promised or Let another one perform at expense of obligor
Exception: If qualities of the Obligor are considered (only he can do it)
 Duties of an Obligor (Not To Do)
1.) Not to perform the conduct prohibited; otherwise undone at debtors expense

Remedies to the Creditor in case of breach (To Give)

1.) Substituted performance or delivery of same class as stipulated at the expense of the debtor
plus damages (1165, par.2)
Remedies to the Creditor in case of breach (To Do)
1.) Substituted Performance at the expense of the debtor plus damages
Exception: If qualities of the Obligor are considered (Damages only)
If poorly performed:
1.) Ask the obligor to undo, at his own expense
Remedies to the Creditor in case of breach (Not to Do)
1.) Action for Damages
2.) Undo the act prohibited plus damages

Divisible Obligation (can be performed partially) and Indivisible Obligation (cannot be performed partially)
General Rule: Presumption of indivisibility
- One debtor, one creditor, does not alter or modify; indivisible
- Joint indivisible obligation gives rise to indemnity for damages from the time one debtor does not perform.
- The debtors who are ready to perform shall contribute only their share and not damages.
- Obligation to give a specific thing and those that cannot be performed partially are deemed indivisible.
- When the object involves the execution of a certain number of days if work, they are divisible.
- Even if by nature the object is divisible, still indivisible if the law or stipulation

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Obligation with a Penal Clause

General Rule: Penal clause serves to replace reparation or damages in case of breach

Proof of damages not necessary for stipulated penalty (mere breach of contract is enough)
Exception: (1) Stipulation to contrary (2) obligor does not pay agreed penalty (3) there is fraud
In which case creditor is entitled to penalty and damages.
If injured party decides to indemnify for damages, he must secure proof for damages sustained.

Limitation of Rights:

Creditor:
1.) Cannot demand for penalty plus damages unless stipulated
2.) If he chooses fulfillment and obligation becomes impossible without his fault he can still pick penalty.
3.) If obligation is impossible because of fault of the debtor, he is entitled to penalty plus damages
Debtor:
 1.) Cannot exempt himself from performance by paying the penalty unless stipulated.
Judge can reduce the penalty when:
1.) Principal obligation has been partly or irregularly complied with
2.) Even if no performance, it is grossly unfair or morally wrong
Judge can also delete the penalty clause when:
1.) Substantial performance in good faith by obligor
2.) Clause itself suffers from fatal infirmity(weakness) /exceptional circumstances exists

Sources of Obligatoion

Contracts – Have the force of law between contracting parties, complied in good faith
Once perfected, neither party can renege (go against)a without the consent of the other

Quasi-Contracts
Concept: No meeting of the minds, no consent, however one party has benefited from the act of the other therefore,
and the former has the obligation to pay for damages.
Example: act of managing the property of the person, helping neighbor during a fire
Unjust Enrichment (Solutio Indebiti) – getting something that does not belong to you, at the expense of another person

Law – Not presumed, only those determined by the NCC or Special Laws
Example: obligation to support, payment of taxes

Delicts – Acts or omissions punishable by law

Quasi-Delicts
Concept: There is an element of negligence, covered by torts and damages

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Delay:

Kinds:
1.) Delay on the part of the Debtor (Mora Solvendi)
2.) Delay on the part of the Obligor (Mora Accipiendi)
 3.) Delay on both parties (Compensio Morae)
General Rule: No demand, No delay
Ordinary Delay – Failure to comply before judicial or extra judicial demand
Default – Failure to comply after judicial or extra judicial demand
Exception: (LETDA)
1.) Law
2.) Expressly Stipulated
3.) Time is of the Essence (wedding dress, wedding cake)
4.) Demand would be useless; beyond the power of the obligor to perform
5.) Acknowledges Default

Reciprocal obligations
- Delay from the moment that one of the parties has already fulfilled his obligation.

Fortuitous Event
General Rule: Debtor is released from his liability
Requisites: (IIID)
1.) Independent from the will of the debtor
2.) Impossible to foresee, or even if foreseen, cannot be avoided
3.) Impossible for the debtor to perform in a normal way
4.) Debtor has no fault (Delay, Negligent)

Exceptions: (LEADDBOO)
1.) Law (Art 1942)
2.) Expressly Stipulated
3.) Assumption of Risk
4.) Debtor is in Delay
5.) Debtor is Negligent or Fault
6.) Bad Faith
7.) Obligation rises from criminal offense
8.) Object is generic

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Negligence:

Culpa Acquilana – Negligence of one party

Culpa Criminal – Negligence stemming from a criminal act
Culpa Contractual – Negligence or failure to comply with the contract (breach)

Effect of Good Faith: liable only for natural and probable consequences of breach of the obligation and which the
parties have foreseen or could have reasonable foreseen.
Effect of Bad Faith: can be held liable for all damages which may be reasonable attributed to the nonperformance of
the obligation.

Contributory negligence:
Proximate cause of accident:
Obligee – cannot be liable for damages
Obligor – cannot recover damages

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Fraud:

Incidental Fraud – Liable for damages only, purpose of evading the normal fulfillment of the obligation
Causal Fraud – Vitiates the contract, employed for securing consent or the reason for entering the contract.

Waiver of renunciation of future fraud is void. (Renunciation of the actin for a fraud which has not been committed)

General Rules:

Creditor issues receipt to debtor without reservation to the interest; presumed interest has been paid.
Creditor issues receipt of later installments without reservation to prior installments; presumed that prior
installments have been paid.

Additional Remedies to Creditor:

1. Exhaust all property of the debtor

2. Subrogate all rights of the debtor
a. Debtor must be indebted to creditor
b. Creditor is prejudiced by in action of debtor to proceed against third person
c. Creditor must first exhaust all property of the debtor.
3.) Impugn all acts used by debtor to defraud him

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Extinguishment of Obligations

Obligations are extinguished when: (PLCCC)

1.) Payment or performance
2.) Loss of the thing due
3.) Condonation/Remission
4.) Confusion or Merger
 5.) Compensation
6.) Novation

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Payment or Performance – An obligation is complied with when payment or performance has been rendered

General Rule: Debt shall not been paid unless thing or service has been completely delivered or rendered.
Exception: (1) Substantial performance in good faith: When obligor admits breach of contract (good faith) and breach
is slight, technical or unimportant, the law deems this performance as substantial and although obligor still has to pay
for damages, he is nonetheless entitled to allowance. (2)When Obligee accepts performance without protest or
objection, obligation deemed complied (estoppel).

- Creditor not bound to accept payment from a third person with no interest in fulfillment of the obligation
Exception: (1) when third person has interest in fulfillment of the obligation (2) Unless stipulated.
- Whoever pays for another may demand reimbursement of the full amount.
Exception: When without knowledge or against the will of the debtor, can only recover payment that has been
beneficial to the debtor.
- Whoever pays on behalf of debtor without knowledge of or against the will of the latter cannot compel creditor to
subrogate his rights such as, (1) mortgages (2) guarantee (3) penalty.
- Payment without intention of reimbursement is deemed a donation; requires debtors consent.

Rights of a Third Person:

If with the knowledge and consent of the debtor:

1.) Recover the whole amount
2.) Subrogated to all the rights of the creditor

If without the knowledge or consent of the debtor:

1.) Recover only the payment beneficial to the debtor

General Rule: Payment /delivery to a minor/ insane or anyone without the capacity to alienate shall not be valid
Exception: He has kept the thing delivered or if payment beneficial to him

General Rule: Payment should be made to (1) person in whose favor the obligation has been constituted (2) his
successor in interest (3) any authorized person.

- If payment is made to unauthorized persons, not valid.

Exceptions: (1) redounded to the benefit of the creditor (2) payment made to the possessor of credit in good faith

Benefit need not be proved in the following:

(1) After payment, third person acquires creditors right
(2) Creditor ratifies payment to the third person
(3) Creditors conduct led to believe that third person had authority
- Payment made after judicial order to retain shall not be valid
- Debtor of a thing cannot compel creditor to receive different one, even if same or more value.
- Act of forbearance cannot be substituted by another act of forbearance against obligee’s will.
- When thing to be delivered is generic/indeterminate, creditor cannot demand thing of superior quality, debtor
cannot deliver of inferior quality.
- Extrajudicial expenses; debtor. Unless stipulated
- Creditor cannot be compelled partial prestation, debtor cannot be required to make partial payments. Unless
stipulated
- If debt is part liquidated and part unliquitated, creditor may demand payment for the liquidated amount without
waiting for the liquidation of the latter.

General Rule: Payment in money should be in PH Legal Tender (Republic Act 4100)
Exceptions: (1) Checks, notes, or bills do not produce the effect of payment unless cashed (2) when through the fault of
the creditor they have been impaired.
Extraordinary inflation or deflation (war) value of the currency at the time of establishment of the contract shall be
the basis of payment. Unless, stipulated.

Where to pay: (1) place stipulated (2) determinate thing, no stipulation, place where the thing might be the moment
the obligation was constituted (3) domicile of the debtor. In that specific order.
If debtor changes domicile in bad faith or has incurred delay, expenses borne by him.

Application of Payment

- Various debts of the same kind to same creditor make declare upon payment which debt payment applies.
- Right must be exercised at the time payment is made.
- In order that there be an application of payment, requisites:
1.) One debtor and one creditor
2.) Two or more debts of the same kind
3.) All debts must be due
Exception: (1) Stipulation (2) payment was made by party who benefited from the term.
Application can now be made as to debts that are not yet due.
4.) Amount paid is not sufficient to cover total amount die.
- If debtor does not avail of right to designate debt, and accepts receipts from creditor regarding the application of
the payment, debtor cannot complain, unless there is a cause for invalidity. Debtor may accept or reject the receipt
presented by the creditor.
- If debt produces interest, payment of principal deemed to have not been made until interests have been covered
(directory, not mandatory)
- When preceding rules or application cannot applied, debt most onerous (burdensome, this case beneficial) to the
debtor is deemed to have satisfied.
- If debts of same nature and burden, applied to all proportionally.

Tender of payment and Consignation

If creditor refuses without just cause the payment of the debtor, latter shall be released from responsibility upon
consignation (deposit of object to a competent court)
Requisites of consignation (1) there is debt due (2) creditor refuses without cause (3) notice of consignation has been
given (4) thing or amount has been placed at the disposal of judicial authority.

General Rule: there must tender of payment made by the debtor to the creditor in order for consignation to be
effective.
Exception:
1.) Creditor is unknown
2.) Creditor is incapacitated to receive payment at time due
3.) Refusal without just cause to give receipt
4.) Two or more persons claim right to collect
5.) Title of obligation has been lost

Expenses of the consignation, creditor.

Consignation duly made, debtor may ask judge to order the cancellation of the obligation

Effects of consignation:
1.) If creditor accepts without contesting validity or efficiency; obligation extinguished
2.) If creditor contests; litigation

Effect of withdrawal of the object or amount consigned:

Debtor - Before creditor has accepted or before judicial declaration, if withdrawn, obligation remain in force.
Creditor – lose every preference which he may have over the thing. Solidary co-debtors, guarantors, sureties, shall be
released.

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Loss of the thing due

General Rule: Determinate thing lost via fortuitous event; obligation extinguished.
Exception to fortuitous event
1.) Law
2.) Stipulation
3.) Assumption of risk (common carriers)
4.) After default of the debtor
5.) Fault of the debtor
6.) Bad faith
7.) Source of obligation arising from criminal offense
8.) Item is generic
- Determinate thing, In case of loss without the fault or delay of the debtor; extinguished.
Requisites: (1) thing must be determinate (2) lost without fault or delay of debtor
- Loss of indeterminate thing does not extinguish an obligation (genus of a thing can never perish)
- Courts shall determine whether partial of the object important enough to warrant extinguishment
- Thing is lost while in the possession of the debtor; presumed that loss was due to his fault, unless there is proof of
the contrary. Does not apply to earthquakes, flood, storm or other natural calamity (fortuitous events/act of god)
- Debtor in an obligation to do shall be released from compliance when prestation becomes legally or physically
impossible, without fault of the debtor.
- If service has become so difficult and manifestly beyond contemplation of the parties, obligor may be released from
obligation, in whole or in part.
Rebus Sic Stantibus – parties stipulate in light of certain prevailing conditions, and once conditions cease to exist, the
contract also ceases to exist considering practical needs and the demands of equality and good faith, the disappearance
of the basis of the contract gives rise to a right to relief in favor of the party prejudiced.
- Debt of a specific thing is from a criminal offense, does not except debtor from payment (fortuitous event)
Exception: thing has been offered, creditor refused without justification to accept it.
Options for the debtor (1) consignation (2) keep the thing
- If the obligation is extinguished by the loss of the thing, all the rights the debtor may have against a third person by
reason of the loss is transferred to the creditor.

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Condonation or Remission

Concept – act or liberty by virtue of oblige, without receiving any price or equivalent, renounces the enforcement of the
obligation as a result extinguishes the obligation.

Requisites:
1.) Must be gratuitous
2.) Must be accepted by the obligor
a. Expressly
b. Implied
3.) Obligation must be demandable

Kinds:
1.) Expressed – when made in accordance with the law
2.) Implied – deduced from the acts if the creditor
3.) Total – entire obligation is extinguished
4.) Partial – only part of the obligation is extinguished

- Delivery of a private document evidencing credit, made voluntary by the creditor to the debtor implies renunciation
of the action
Defense of Creditor:
Must claim it to be in officious.

Defense if debtor:
Upheld by proving that the delivery of the document was made by virtue of payment of the debt

- Private document of the debt found in the possession of the debtor, presumed voluntarily delivered by creditor,
unless otherwise proven.
- Renunciation of principal debt shall extinguish accessory obligation, waiver of accessory obligation does not
extinguish the principal debt
- Accessory obligation of pledge has been presumed remitted when the thing pledged is found in the possession of
the debtor or a third person who owns the thing.

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Confusion or Merger

Concept: mergers of the characters of creditors and debtors in one and the same person by virtue of which the obligation
is extinguished.

Requisites:
1.) That the merger of the characters of the creditor and debtor must be in the same person
2.) That it must take place in the person of either the principal creditor or the principal debtor
3.) It must be complete and definite (whether merger refer to entire obligation or in part it must be of such a
character that will be complete and definite meeting of all qualities of creditor and debtor)

- If the confusion or merger of rights will take place in the person of either principal creditor or principal debtor,
extinguishment of not only principal obligation but of the accessory obligation.

- If confusion of merger will take place in the person of a subsidiary creditor or a subsidiary debtor, such as guarantor,
there is no extinguishment of the principal obligation there will only be a substitution of creditor to debtor.

- Confusion does not extinguish a joint obligation except as regards to the share of the creditor or debtor in whom
the confusion or merger pertains. Merely a partial extinguishment of debt, creditor may still proceed against other
debtors.

- Solidary Obligations, confusion or merger; entire obligation is extinguished without prejudice to the rights of both
solidary creditors and debtors among themselves.

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Compensation

Concept – mode of extinguishment in their concurrent amount those obligations of persons who in their own right are
creditors and debtors of each other.

Advantage:
1.) Facility of payment because it takes effect by operation of law
2.) Guaranty for the effectively of the credit

Distinguished from payment

1.) Requisites prescribed by law are different from payments

2.) Compensation takes effect by operation of law, payment needs and act of the parties
3.) Capacity to give and to acquire is not necessary in compensation, essential in payment
4.) Compensation as a rule is partial, payment as a rule is complete and indivisible

Distinguished from confusion

1.) Compensation 2 person who in their own right are creditors and debtors of each other. Confusion there is only
one person merged with the qualities of creditor and debtor
2.) At least two obligations in compensation, in confusion there is only one

Kinds of compensation:

Legal – takes effect by operation of law from the moment the requirements are present.
Voluntary – when the parties who are mutually creditors and debtors agree to compensate their respective obligations.
Judicial – takes effect by judicial decree
Total – debts compensated are equal in amount
Partial – debts compensated are not of equal amount

Requisites of Compensation

1.) There must be two parties

a. Mutually creditors and debtors of each other in their own right
b. The be bound as principals
2.) Both debts consist of a sum of money or are consumable, same kind, same quality
3.) Two debts are due
4.) Liquidated and demandable
Liquidated – those amount of which may be determined by a simple arithmetical operation
If both are partially liquidated compensation may take place with respect to the parts which are liquidated
5.) That over neither of them there be any retention or controversy commenced by third persons and
communicated due time to the debtor

- Guarantors may set up compensation as regards what the creditor may owe the principal debtor.
- Compensation may be total or partial, when to debts are of the same amount there is total compensation.
- Parties may agree upon compensation of debts which are not yet due
- When both debts are rescissible or voidable, they may be compensated against each other before judicially rescinded
or avoided.
- If a person should have several debts that can be compensated, rules of application of payments shall apply
- When all requisites mention in art 1279 are present, compensation takes effect by operation of law, and extinguishes
both debts to the current amount even though creditors and debtors are not aware.

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Novation

Concept – substitution or change of an obligation by another resulting in the extinguishment or modification either by:
1.) Changing the object or principal conditions
2.) Substituting the person of the debtor
3.) Subrogating a third person in the right of the creditor

Kinds:
Extinctive – when an old obligation is terminated by the new obligation
Modficatory - when old obligation subsist to the extend it remains compatible with the new obligation

Requisites:
1.) Previous valid obligation
2.) Agreement of the parties to new obligation
3.) Extinguishment of the old obligation
4.) Validity of the new obligation

In changing the object or principal conditions, it is required that these changes be so declared in unequivocal terms.
(Express novation)
OR
The old and the new obligations have to be incompatible on every point with each other. (Implied novation)

General Rule: Fore novation to take place there must be a complete incompatibility between two obligations. The test
of compatibility is simple, whether the two obligations can stand together, if they can stand together there is no
incompatibility, if there is no incompatibility there is novation.\

- In substitution of a new debtor, may be done even without the knowledge or against the will of the old debtor but not
without the consent of the creditor

- If substitution is without knowledge or against the will of the debtor, insolvency or non-fulfillment shall not give rise
to a liability on the part of the original debtor

- Insolvency of the new debtor, who has been proposed by old debtor and accepted by creditor, the latter cannot
proceed against the original debtor unless the insolvency was already existing and of public knowledge.

- When principal obligations are extinguished by virtue of novation, accessory obligations may subsist only insofar as
they benefit third persons who did not consent.
- If new obligation is void, the previous subsists, unless stipulated.
- Novation is void if original obligation is void
- The new obligation carries the suspensive or resolutory condition attached to the previous obligation unless, there is
a contrary stipulation.
- Novation by subrogation is either
(1) Legal - by operation of law
Presumed when:
1.) creditor pays another creditor who is not preferred, even without the debtors knowledge
2.) third person, not interested in the obligation pays with the express or tacit approval of the debtor
3.) 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 – agreement of original creditor, original debtor and new debtor; not presumed, must clearly be
established to take effect
- Conventional subrogation of third person requires consent of all parties involved

Effect of subrogation- transfers to the third person subrogated the credit with all the rights which the original creditor
had against the debtor or against third person.