MODULE

Flexible Learning A.Y. 2020-2021

OBLIGATIONS AND CONTRACTS STUDY GUIDE

4 Course instructor: Atty. Rey-An N. Trinidad, J.D.

Contact details: | Email: r.trinidad@usls.edu.ph| Phone: +63 908 883 4292, (034) 707-3400
Consultation schedule: Monday 5:30 - 6:30 PM/6:30-7:30 PM | Tuesday 5:30-7:00PM
6 hours
Extinguishment of Obligation

After learning the preliminaries of Obligation, we are now down to study the modes of
extinguishment or termination of obligation We will learn the following modes to extinguish
obligation such as payment or performance, loss of the thing due, condonation or remission of
the debt, by the confusion or merger of the rights of creditor and debtor, compensation and
novation. In addition, it may also include compromise, happening of a fortuitous event, death of
a party in a personal obligation, impossibility of fulfillment and mutual desistance.

Learning Outcomes

At the end of this module, you must:

1. Identify , distinguish and determine the ground(s) that will lead to the extinguishment of an
obligation;
2.Analyze the causes and effects and/or consequences of the extinguishment of the obligation;
3.Outline the procedure and mechanics involve in terminating the contract;
4.To
identify the elements necessary to extinguish an obligation and provide the appropriate
remedial measures.

What’s on your mind?

Instructions: Answer the guide questions below. Use the space provided for your answers.

1.Tell me about your experience when you committed and bound yourself to
do an obligation for another person and how were you able to fulfill it.

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 1.Kindly enumerate and discuss briefly the different modes
of extinguishment of obligation.

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 CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS

GENERAL PROVISIONS

(ANNOTATIONS TAKEN FROM THE BOOK OF BALLADA and HECTOR DE LEON)

ARTICLE 1231

OBLIGATIONS ARE EXTINGUISHED:

1. By Payment or Performance;
2. By Loss of the Thing Due;
3. By the Condonation or Remission of the date;
4. By the Confusion or Merger of the rights of Creditor and Debtor
5. By Compensation
6. By Novation

OTHE CAUSES OF EXTINGUISHMENT OF THE OBLIGATION FOUND

ELSEWHERE IN THE CODE:

1. Annulment
2. Rescission
3. Fulfillment of the Resolutory Condition
4. Prescription

ADDITIONAL MODES OF EXTINGUISHING AN OBLIGATIONS NOT

MENTIONED IN ARTICLE 1231:

1. Compromise
2. Happening of a Fortuitous Event (Specific Thing)
3. Death of a Party in a Personal Obligation
4. Impossibility of Fulfillment
5. Mutual Desistance

SECTION 1: PAYMENT and PERFORMANCE

ARTICLE 1232

PAYMENT MEANS NOT ONLY DELIVERY OF MONEY BUT ALSO THE

PERFORMANCE, in any MANNER OF AN OBLIGATION

• Payment – may either be:

f. Delivery of Money of Thing (obligation to give)
g. The Doing of a Thing (obligation to do)
h. Desistance from doing something (in obligations not to do)
• Performance – means that parties to the contract have done which they
agreed to do.
• Possibility of Non – Performance should be anticipated when drawing up
contract terms and conditions.

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ARTICLE 1233

DEBT SHALL NOT BE UNDERSTOOD TO HAVE BEEN PAID UNLESS THE

THING or SERVICE in WHICH THE OBLIGATION CONSISTS HAS BEEN
COMPLETELY DELIVERED OR RENDERED, as the case may be.

• Requisites for Payment:

▪ IDENTITY – means that the very thing must be delivered or
released (money or other specific things)
▪ INTEGRITY – means the prestation must be fulfilled
completely (in full)

ARTICLE 1234

IF THE OBLIGATION HAS BEEN SUBSTANTIALLY PERFORMED IN GOOD

FAITH, THE OBLIGOR MAY RECOVER AS THOUGH THERE HAD BEEN A
STRICT AND COMPLETE FULFILLMENT, LESS DAMAGES SUFFERED BY
THE OBLIGEE.

ARTICLE 1235

WHEN THE OBLIGEE ACCEPTS THE PERFORMANCE, KNOWING ITS

INCOMPLETENESS OR IRREGULARITY, AND WITHOUT EXPRESSING
ANY PROTEST OR OBJECTION, THE OBLIGATION IS DEEMED FULLY
COMPLIED WITH.

• EXCEPTION TO THE RULE ON ARTICLE 1233:

▪ Article 1234: SUBSTANTIAL COMPLIANCE IN GOOD

FAITH
• There must be substantial performance (essential parts
has been performed – Material part was performed and
technical or less important part was left)
• Good faith – attempt to comply but was not able to do so
due to external reasons (EXCUSABLE NEGLECT)
o EFFECT – Damages (reduction in price)

▪ Ar ticle 1235: INCOMPLETE or IRREGUL AR

PERFORMANCE WITHOUT PROTEST ON THE PART OF
THE CREDITOR (PARTIAL PERFORMANCE
• Principle of Estoppel
• No Damages since deemed complete
• Protest to be made must be within a reasonable time

ARTICLE 1236

THE CREDITOR IS NOT BOUND TO ACCEPT PAYMENT OR PEFORMANCE

BY A THIRD PERSON WHO HAS NO INTEREST IN THE FULFILLMENT OF
THE OBLIGATION, UNLESS THERE IS STIPULATION TO THE CONTRARY.
(Par. 1)

• Article 1236 to 1238 – 3rd person pays or performs the obligation of the
debtor.

• PERSONS WHO MAY PAY THE CREDITOR:

1. The Debtor
2. Third person with interest (surety or guarantor)
3. Third person without interest but stipulated by the parties
i. Nos. 1 to 3 subject to right of subrogation

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 4. Third person without interest and without stipulation (creditor is
not forced to accept but if he accepts, extinguishes the obligation)

• Creditor is not bound to accept payment or performance by third person

who has no interest in the fulfillment of the obligation UNLESS, the parties
stipulated that payment will be made by a 3rd perons who has no interest in
the obligation.

WHOEVER PAYS FOR ANOTHER MAY DEMAND FROM THE DEBTOR

WHAT HE HAS PAID, EXCEPT THAT IF HE PAID WITHOUT THE
KNOWLEDGE OR AGAINST THE WILL OF THE DEBTOR, HE CAN RECOVER
ONLY INSOFAR AS THE PAYMENT HAS BEEN BENEFICIAL TO THE
DEBTOR(Beneficial Reimbursement) (Par. 2)

• EFFECTS OF PAYMENT:

4. When a 3rd person pay the creditor without the knowledge or against
the will of creditor:

a) the 3rd person can recover only up to the extent that the
payment benefited the debtor.
b) The 3rd person cannot compel the creditor to subrogate him in
his rights, such as those arising from mortgage, guaranty, or
penalty.

5. When a third person who pays the creditor does not intend to be
reimbursed by the debtor, the payment shall be deemed to be a
donation.

ARTICLE 1237

WHOEVER PAYS ON BEHALF OF THE DEBTOR WITHOUT THE

KNOWLEDGE OR AGAINST THE WILL OF THE LATTER, CANNOT COMPEL
THE CREDITOR TO SUBROGATE HIM IN HIS RIGHTS, SUCH AS THOSE
ARISING FROM A MORTGAGE, GUARNTY, or PENALTY.

• D borrowed from C P 10,000.00

• G is the guarantor
• Without the consent of D, S paid C P 10,000.00
• S can claim reimbursement from the D the whole amount in which he was
benefited
• If D cannot pay, S cannot proceed against the guarantor.

ARTICLE 1238

PAYMENT MADE BY A THIRD PERSON WHO DOES NOT INTEND TO BE

REIMBURSED BY THE DEBTOR IS DEEMED TO BE A DONATION, WHICH
REQUIRES THE DEBTOR’S CONSENT. BUT THE PAYMENT IS IN ANY
CASE VALID AS TO THE CREDITOR WHO HAS ACCEPTED IT.

• LEGAL EFFECT OF CREDITOR’S ACCEPTANCE:

Since payment by the 3rd Person who does not want to be

reimbursed is treated as a donation to the Debtor, CONSENT of the
Debtor is required. However, such payment shall still be valid to the
Creditor who accepted the same.

ARTICLE 1239

IN OBLIGATION TO GIVE, PAYMENT MADE BY ONE WHO DOES NOT HAVE

THE FREE DISPOSAL OF THE THING DUE AND CAPACITY TO ALIENATE

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IT SHALL NOT BE VALID, WITHOUT PREJUDICE TO THE PROVISIONS OF
ARTICLE 1427 UNDER THE TITLE ON “NATURAL OBLIGATIONS”.

• FREE DISPOSAL OF THE THING DUE: means that the thing to be

delivered must not be subject to any claim or lien or encumbrance (e.g.
mortgage, pledge) of a third person.

• CAPACITY TO ALIENATE: means person not incapacitated to enter into

any contract and for that matter make disposition of the thing due.

• RULES:

o General Rule: In obligations to give, payment by one who does not

have free disposal of the thing due and capacity to alienate it is NOT
VALID. This means the thing given can be recovered.

o EXCEPTION:
Article 1427. When a minor between eighteen and twenty-
one years of age, who has entered into a contract without
the consent of the parent or guardian, voluntarily pays a
sum of money or delivers a fungible thing in fulfillment of
the obligation, there shall be no right to recover the same
from the obligee who has spent or consumed it in good faith.

TO WHOM PAYMENT SHOULD BE MADE

ARTICLE 1240

PAYMENT SHALL BE MADE TO THE PERSON IN WHOSE FAVOR THE

OBLIGATION HAS BEEN CONSTITUTED, OR HIS SUCCESSOR IN
INTEREST, OR ANY PERSON AUTHORIZED TO RECEIVE IT.

• PAYMENT SHALL BE MADE TO:

1. The creditor or oblige (person in whose favor obligation has been
constituted);
2. His successor in interest (like an heir or assignee);
3. Any person authorized to receive it.

• THE CREDITOR refers to the creditor at the time of payment not when
the obligation was constituted or created.

• If a person is SUBROGATED to the right of the old/original creditor,

payment should be made to the new/subrogated creditor.

• MEANING of “Any Authorized Person to Receive it”

It means not only a person authorized by the creditor, but also a person
authorized by law to receive the payment, such as guardian, executor,
or administrator of the estate of the deceased, and assignee or
liquidator of a partnership or corporation as well as any other person
who may be authorized to do so by law. (Haw Pia vs China Banking
Corporation 80 Phil 604)

ARTICLE 1241

PAYMENT MADE TO THE PERSON WHO IS INCAPACITATED TO

ADMINSTER HIS PROPERTY SHALL BE VALID IF HE HAS KEPT THE
THING DELIVERED OR INSO FAR AS THE PAYMENT IS BENEFICIAL TO
HIM.

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PAYMENT MADE TO A THIRD PERSON SHALL ALSO BE VALID IN SO FAR
AS IT HAS REDOUNDED TO THE BENEFIT OF THE CREDITOR. BENEFIT
NEED NOT BE PROVED IN THE FOLLOWING CASES:

a) IF after payment, the third person acquired the creditors rights

b) If creditor ratifies the payment of the third person
c) If by creditors conduct, debtor was made to believe that the third
person has authority.

• EFFECT OF PAYMENT TO AN INCAPACITATED PERSON

o Payment to incapacitated person is not valid unless:

1. He kept the thing paid and delivered
2. He was benefited by the payment

o The guardian or the incapacitated person after recovering from his

incapacity may collect such obligation again from the debtor.

o Proof if benefit to the incapacitated person needs to be established by

the debtor who made payment.
• EFFECT OF PAYMENT TO THIRD PERSON:

o Payment to third person or wrong party is not valid except insofar

as it has redounded to the benefit of the creditor;

o The creditor was benefited by the payment made by the debtor to a

3rd person is NOT PRESUMED and MUST therefore be satisfactorily
established by the person interested in proving this fact.

o In the absence of proof, the payment thereof in error and in good

faith will not deprive the creditor of his right to demand payment.

• WHEN BENEFIT TO CREDITOR NEED NOT BE PROVED BY DEBTOR:

1. Subrogation of the payer in creditor’s rights

2. Ratification by the creditor; or
3. Estoppel on the part of the creditor. (par. 2)

ARTICLE 1242

PAYMENT MADE IN GOOD FAITH TO ANY PERSON IN POSSESSION OF

THE CREDIT SHALL RELEASE THE DEBTOR.

• Another valid payment in the hands of the 3rd person

• Possession of the credit itself not just mere proof of credit like the contract
of loan.

ARTICLE 1243

PAYMENT MADE TO THE CREDITOR BY THE DEBTOR AFTER THE

LATTER HAS BEEN JUDICIALLY ORDERED TO RETAIN THE DEBT SHALL
NOT BE VALID.

• WHEN PAYMENT TO CREDITOR NOT VALID: In an action against the

debtor who is the creditor of another, the latter (debtor 3rd person) during
the pendency of the case may be ordered by the court or any competent
authority to RETAIN the debt until the right of the creditor in the main
case is resolved.

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 • Garnishment - - warning to those in possession of another person’s
property not to give it to him while there is a pending litigation.

ARTICLE 1244

THE DEBTOR OF THE THING CANNOT COMPEL THE CREDITOR TO

RECEIVE A DIFFERENT ONE ALTHOUGH THE LATTER IS THE SAME OR
MORE VALUABLE THAN THE ORIGINAL.

IN OBLIGATIONS TO DO OR NOT TO DO, AN ACT OR FORBEARANCE

CANNOT BE SUBSTITUTED BY ANOTHER ACT OR FORBEARANCE
AGAINST THE OBLIGEE’S WILL.

• In an obligation to deliver a determinate or specific thing, the thing as

agreed by the parties as stated in the contract must be the one that needs
to be delivered.
• A different thing, may it be more valuable, less valuable, or equal will not
suffice.

ARTICLE 1245

DATION IN PAYMENT, WHEREBY PROPERTY IS ALIENATED TO THE

CREDITOR IN SATISFACTION OF A DEBT IN MONEY, SHALL BE
GOVERNED BY THE LAW OF SALES.

• SPECIAL MODES OF PAYMENT:

1. Dation in Payment
2. Application of payments
3. Payment by Cession
4. Tender of Payment and Consignation

DATION IN PAYMENT

• The debtor alienates property by the creditor in satisfaction of his debt in

money, IN other words, the obligation which consists in the payment of
money is paid in the form or property.

• Special mode of payment since an existing debt in money is satisfied not by

payment of money but by alienation of property.

• Other Names: Payment in Kind/Datio in solutum/Adjudecacion en pago

• THE LAW ON SALES governs dation in payment because it can be

considered as specie of the sale in which the amount of money debt
becomes the price of the thing alienated.

ARTICLE 1246

WHEN THE OBLIGATION CONSISTS IN THE DELIVERY OF AN

INDERTERMINATE OR GENERIC THING, WHOSE QUALIT Y and
CIRCUMSTANCES HAVE NOT BEEN STATED, THE CREDITOR CANNOT
DEMAND A THING OF SUPERIOR QUALITY. NEITHER CAN THE DEBTOR
DELIVER A THING OF INFERIOR QUALITY. THE PURPOSE OF THE
OBLIGATION AND OTHER CIRCUMSTANCES SHALL BE TAKEN INTO
CONSIDERATION.

• The creditor cannot demand one of superior quality

• The debtor cannot deliver one of inferior quality.

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 • The purpose of th obligation and other circumstances should be considered
in determining the kind and quality to be delivered.

• The article is based on the principle of equity that it supplies justice in

cases where there is lack or precise declaration in the obligation.

ARTICLE 1247

UNLESS OTHERWISE STIPULATED, THE EXTRAJUDICIAL EXPENSES

REQUIRED BY THE PAYMENT SHALL BE FOR THE ACCOUNT OF THE
DEBTOR. WITH REGARD TO JUDICIAL COSTS, THE RULES OF COURT
SHALL GOVERN.

• The debtor pays for extrajudicial expenses on the payment of the

obligation.

• By payment of the obligation, the debtor’s obligation is extinguished. Since

he is benefited from it, he should pay for the extrajudicial expenses.

• If the party stipulated as to who will pay for the extrajudicial expenses,
then they should follow what they agreed.

ARTICLE 1248

UNLESS THERE IS AN EXPRESS STIPULATION TO THAT EFFECT, THE

CREDITOR CANNOT BE COMPELLED PARTIALLY TO RECEIVE THE
PRESTATIONS IN WHICH THE OBLIGATION CONSISTS. NEITHER MAY
THE DEBTOR BE REQUIRED TO MAKE PARTIAL PAYMENTS.

HOWEVER, WHEN THE DEBT IS IN PART LIQUIDATED AND IN PART

UNLIQUIDATED, THE CREDITOR MAY DEMAND AND THE DEBTOR MAY
EFFECT THE PAYMENT OF THE FORMER WITHOUT WAIVING FOR THE
LIQUIDATION OF THE LATTER.

• The provision is applicable where there is only one creditor and one debtor.

• In order that payment may extinguish an obligation, it is necessary that

there must be complete performance of the prestation.

• Creditor may accept partial performance but he cannot be compelled.

• When partial performance is allowed:

1. When there is express stipulation
2. When the debt is in part liquidated (definite, determined, and
computed) and in part unliquidated.
3. When different prestations in the obligations are subject to different
terms or conditions which affects some of them.
▪ Obligations with several prestations, it is evident that the
prestations need not be executed simultaneously but each
successive execution thereof must be complete.

ARTICLE 1249

THE PAYMENT IN MONEY SHOULD BE ACCORDING TO CURRENCY

STIPULATED and IF IT IS NOT POSSIBLE TO DELIVER SUCH CURRENCY,
THE LEGAL TENDER IN THE PHILIPPINES.

PAYMENT OF A PROMISSORY NOTE or A BILL OF EXCHANGE or OTHER

MERCANTILE DOCUMENT IS CONSIDERED PAYMENT ONLY WHEN THEY

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HAVE BEEN CASHED OR WHEN THROUGH THE FAULT OF THE CREDITOR,
THEY HAVE BEEN IMPAIRED.

IN THE MEANTIME, THE ACTION DERIVED FROM THE ORIGINAL

OBLIGATION SHALL BE HELD IN ABEYANCE.

• Legal Tender is that currency which if offered by the debtor in the right
amount, the creditor must accept in payment of a debt in money.
• Legal Tender in the Philippines - - all coins and money issued by the BSP
• Payment by means of Instrument of Credits:

1. RIGHTS OF CREDITOR TO REFUSE or ACCEPT – Promissory Notes,

Checks, Bills of Exchange and other Commercial documents are not
LEGAL TENDER. The creditor cannot be compelled to accept them.
a. The creditor in the meantime if he chooses, may accept them,
without acceptance producing payment. In the meantime,
demandability of the original obligation is suspended.
b. The creditor must cash the instrument and it is only when
dishonored that he can bring an action for non – payment of
debt.
2. EFFECT ON OBLIGATION – Payment by instrument of credits DOES
NOT extinguish the obligation:
a. Until they have been encashed;
b. Unless they have been impaired due to the creditor’s fault.
(par. 2)

ARTICLE 1250

IN CASE OF EXTRAORDINARY INFLATION OR DEFLATION OF THE

CURRENCY STIPULATED SHOULD SUPERVENE, THE VALUE OF THE
CURRENCY AT THE TIME OF THE ESTABLISHMENT OF THE OBLIGATION
SHALL BE THE BASIS OF THE PAYMENT, UNLESS THERE IS AN
AGREEMENT TO THE CONTRARY.

• INFLATION – Sharp sudden increase of money or credit or both without

corresponding increase in business transaction. It causes a drop in the
VALUE of money resulting to a rise of the general price level.

• DEFLATION – reduction in the volume and circulation of available money

or credit, resulting in the decline of the general price level. Opposite of
inflation.

• Purchasing value of the currency at the time of the establishment of the

obligation shall be the basis of payment in the event of EXTRAORDINARY
Increase or Decrease in the purchasing power of currency which the
parties could not have reasonable foreseen. This is HOWEVER, subject to
the agreement of the parties.

ARTICLE 1251

PAYMENT SHALL BE MADE IN THE PLACE DESIGNATED IN THE

OBLIGATION.

T H E R E B E I NG NO E X P R E S S S T I P U L AT I O N A N D I F T H E
UNDERTAKING IS TO DELIVER A DETERMINATE THING, THE PAYMENT
SHALL BE MADE WHEREVER THE THING MIGHT BE AT THE MOMENT
THE OBLIGATION WAS CONSTITUTED.

IN ANY OTHER CASE THE PLACE OF PAYMENT SHALL BE THE

DOMICILE OF THE DEBTOR.

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 IF THE DEBTOR CHANGES HIS DOMICILE IN BAD FAITH OR AFTER
HE HAS INCURRED IN DELAY, THE ADDITIONAL EXPENSES SHALL BE
BORNE BY HIM.

THESE PROVISIONS ARE WITHOUT PREJUDICE TO VENUE UNDER

THE RULES OF COURT.

• RULES REGARDING THE PLACE OF PAYMENT OF OBLIGATION WITHOUT

PREJUDICE TO VENUE UNDER THE RULES OF COURT.

1. Place designated in the stipulation or agreement.

2. If there is stipulation and the thing to be delivered is specific, the

payment shall be made at the place where the thing was at the
perfection of the contract. (paragraph 2)

3. If no stipulation and the thing to be delivered in generic, the place of

payment is at the domicile of the debtor. The creditor bears the
expenses in going to the debtor’s place to accept payment subject to
the rule in paragraph 5.

• The order as enumerated above is successive and exclusive as may be

gleaned from the provision itself.

• VENUE – place where court sit or action must be filed or instituted.

• DOMICILE – place of person’s habitual residence. Place where he has his

true fixed permanent home and to which place, he whenever he is absent,
has the intention of returning.

• RESIDENCE - only an element or part of domicile. This simply requires

bodily presence as an inhabitant in the given place.

SUBSECTION 1: APPLICATION OF PAYMENTS

ARTICLE 1252

HE WHO HAS VARIOUS DEBTS OF THE SAME KIND IN FAVOR OF

ONE AND THE SAME CREDITOR MAY DECLARE AT THE TIME OF
MAKING THE PAYMENT, TO WHICH OF THEM THE SAME SHOULD BE
APPLIED. UNLESS THE PARTIES SO STIPULATE, OR WHEN THE
APPLICATION OF PAYMENT IS MADE BY THE PARTY FOR WHOSE
BENEFIT THE TERM HAS BEEN CONSTITUTED, APPLICATION SHALL
NOT BE MASE AS TO DEBTS WHICH ARE NOT YET DUE.

IF THE DEBTOR ACCEPTS FROM THE CREDITOR A RECEIPT IN

WHICH AN APPLICATION OF THE PAYMENT IS MADE, THE FORMER
CANNOT COMPLAIN OF THE SAME, UNLESS THERE IS A CAUSE FOR
INVALIDATING THE CONTRACT.

• APPLICATION OF PAYMENT – is the designation of the debt to which

should be applied a payment made by a debtor who owes several debts in
favor of the same creditor.

• When making payment, the debtor may declare or designate to which of his
various debts said payment is to be applied.

• Once the application is made, it cannot be revoked unless the party’s

consent to revocation.

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 • The purpose of application of payment is to determine which debt should
be extinguished first.

• REQUISITE FOR APPLICATION OF PAYMENT:

1. There is one debt and one creditor

2. There are two or more debts
3. The debts are of the same kinds
4. All debts are due
5. The payment being tendered is not sufficient to extinguish all
obligations.

• WHEN PAYMENT MAY APPLY TO DEBT THAT IS NOT DUE: (As a general
rule, the application shall not be made to debts which are not yet due
except the following)

6. When the parties so stipulate

7. When application of payment is made by the party for whose benefit
the term of period has been constituted.

• TO WHOM RIGHT TO CHOOSE BELONGS: In application of payment, the

right to choose belongs to the debtor unless the parties agrees otherwise.
If properly made by the debtor and the creditor refuses, the creditor may
be considered in DELAY.

• HOW APPLICATION IS MADE:

8. Debtor makes the designation

9. If the debtor fails to designate, the creditor shall have the right to
choose; creditor must state his choice in the receipt
10.If neither debtor nor creditor made application, it shall be in
accordance with Article 1254 of this Code.

ARTICLE 1253

IF THE DEBT PRODUCES INTEREST, PAYMENT OF THE PRINCIPAL

SHALL NOT BE DEEMED TO HAVE BEEN MADE UNTIL THE INTEREST
HAVE BEEN COVERED.

• Payment goes to the interest first then to the principal.

ARTICLE 1254

WHEN THE PAYMENT CANNOT BE APPLIED IN ACCORDANCE WITH THE

PRECEDING RULES, OR IF APPLICATION CANNOT BE INFERRED FROM
OTHER CIRCUMSTANCES, THE DEBT WHICH IS THE MOST ONEROUS TO
THE DEBTOR, AMONG THOSE DUE, SHALL BE DEEMED TO HAVE BEEN
SATISFIED.

IF THE DEBTS DUE ARE OF THE SAME NATURE AND BURDEN, THE
PAYMENT SHALL BE APPLIED TO ALL OF THEM PROPORTIONATELY.

• If Neither Party has exercised the option:

▪ The court will apply the payment according to the most
onerous obligation to the debtor.
▪ If all are onerous, apply payment proportionately.

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 SUBSECTION 2: PAYMENT BY CESSION

ARTICLE 1255

THE DEBTOR MAY CEDE OR ASSIGN HIS PROPERTY TO HIS CREDITORS IN

PAYMENT OF HIS DEBTS. THIS CESSION , UNLESS THERE IS
STIPULATION TO THE CONTRARY, SHALL ONLY RELEASE THE DEBTOR
FORM RESPONSIBILTY FOR THE NET PROCEEDS OF THE THING
ASSIGNED. THE AGREEMENTS WHICH, ON THE EFFECT OF THE
CESSION, ARE MADE BETWEEN THE DEBTOR AND HIS CREDITORS
SHALL BE GOVERNED BY SPECIAL LAWS.

• CESSION – the process by which the debtor transfers all the properties not
subject to execution in favor of the creditors so that the latter may sell
them and apply the proceeds to their credit.

• REQUISITES OF CESSION IN PAYMENT:

1. There is more than one debt

2. There is more than one creditor
3. There is complete or partial insolvency on the part of the debtor
4. There is abandonment of all properties of the debtor except those
exempt from execution.

• CLASSIFICATION OF CESSION
5. LEGAL – that governed by insolvency law. The consent of majority of
the creditors necessary.
6. VOLUNTARY – All creditors must agree

• EFFECTS OF CESSION
7. By cession, the creditors does not become owners. There are mere
assignees who are given the power to sell the property.
8. The debtor shall be released from the obligation only up to the extent
of the net proceeds of the sale of property.
9. The creditors shall collect their credits in the order of preference as
agreed upon; otherwise, in the order established by law.

• CESSION compared to DATION

10.Cession affect all the properties of the debtor while Dation does not.
11.Cession requires more than one creditor while Dation requires only
one.
12.Cession requires complete or partial insolvency of debtor while
Dation may take place even during the solvency of the debtor.
13.Cession does not transfer ownership; Dation transfers ownership
upon delivery.
14.Cession is not an act of novation while Dation is an act of novation.

SUBSECTION 3: TENDER OF PAYMENT and CONSIGNATION

ARTICLE 1256

IF THE CREDITOR TO WHOM TENDER OF PAYMENT HAS BEEN MADE

REFUSES WITHOUT JUST CAUSE TO ACCEPT IT, THE DEBTOR SHALL BE
RELEASED FROM RESPONSIBILITY BY THE CONSIGNATION OF THE
THING OR SUM DUE.

CONSIGNATION ALONE SHALL PRODUCE THE SAME EFFECT IN THE

FOLLOWING CASES:

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 1. WHEN THE CREDITOR IS ABSENT OR UNKNOWN, OR DOES NOT
APPEAR AT THE PLACE OF PAYMENT;
2. WHEN HE IS INCAPACITATED TO RECEIVE THE PAYMENT AT THE
TIME IT IS DUE;
3. WHEN, WITHOUT JUST CAUSE, HE REFUSES TO GIVE A RECEIPT;
4. WHEN TWO OR MORE PERSON CLAIM THE SAME RIGHT TO
COLLECT;
5. WHEN THE TITLE OF THE OBLIGATION HAS BEEN LOST.

ARTICLE 1257

IN ORDER FOR THAT THE CONSIGNATION OF THE THING DUE MAY

RELEASE THE OBLIGOR, IT MUST BE ANNOUNCED TO THE PERSONS
INTERESTED IN THE FULFILLMENT OF THE OBLIGATION.

THE CONSIGNATION SHALL BE INEFFECTUAL IF IT IS NOT MADE

STRICTLY IN CONSONANCE WITH THE PROVISIONS WHICH REGULATE
PAYMENT.

ARTICLE 1258

CONSIGNATION SHALL BE MADE BY DEPOSITING THE THINGS DUE AT

THE DISPOSAL OF JUDICIAL AUTHORITY, BEFORE WHOM THE TENDER
OF PAYMENT SHALL BE PROVED, IN A PROPER CASE, AND THE
ANNOUNCEMENT OF THE CONSIGNATION IN OTHER CASES.

THE CONSIGNATION HAVING BEEN MADE; THE INTERESTED PARTIES

SHALL ALSO BE NOTIFIED THEREOF.

• TENDER OF PAYMENT – is an act on the part of the debtor of offering to the

creditor the thing or amount due. At the time of the offer the debtor must
be able to show that he has in possession the thing or money to be
delivered.

• CONSIGNATION - is an act of disposing the thing or amount due with the

proper court when the creditor refuses to or account to receive it after
complying with the formalities of law. Has the same effect as payment.

• TENDER OF PAYMENT distinguished from CONSIGNATION

1. Tender of payment is antecedent or preparatory act to extinguish

the obligation; consignation is the principal act the produces
payment.

2. Tender of payment is extrajudicial whereas consignation is judicial.

• REQUISITES OF A VALID CONSIGNATION

1. Existence of a valid debt that is due.

2. Tender of payment by the debtor and refusal by the creditor to
accept it without justifiable reason.
3. Previous notice of consignation to interested persons.
4. Consignation of the sum or thing due.
5. Subsequent notice of consignation to interested persons.

• TENDER OF PAYMENT WITHOUT CONSIGNATION – does not extinguish an

obligation since tender of payment is just a preparatory act.

• CONSIGNATION ALONE EXTINGUISHES AN OBLIGATION.(WITHOUT

TENDER OF PAYMENT)

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 1. When the creditor is absent or unknown or does not appear on the
place of payment.
2. When he is incapacitated to receive payment at the time it is due.
3. When, without just cause, he refuses to give a receipt.
4. When two or more persons claim the same right to collect.
5. When the title of the obligation has been lost.

ARTICLE 1259

THE EXPENSES OF CONSIGNATION WHEN PROPERLY MADE, SHALL BE

CHARGED AGAINST THE CREDITOR.

• Consignation is made necessary because of the fault or unjust refusal of the

creditor to accept payment.
• It is just fair that the expenses of consignation should be charged against
him.
• WHEN CONSIGNATION DEEMED PROPERLY MADE:

1. When the creditor accepts the thing or sum deposited without

objection as payment of the obligation.

2. When the creditor questions the validity of consignation, and the

court, after hearing, declares that it has been properly made; and

3. When the creditor neither accepts nor questions the validity of the
consignation, and the court after hearing, orders the cancellation of
the obligation.

ARTICLE 1260

ONCE THE CONSIGNATION HAS BEEN DULY MADE, THE DEBTOR MAY
ASK THE JUDGE TO ORDER THE CANCELLATION OF THE OBLIGATION.

BEFORE THE CREDITOR HAS ACCEPTED THE CONSIGNATION OR BEFORE

A JUDICIAL DECLARATION THAT THE CONSIGNATION HAS BEEN
PROPERLY MADE, THE DEBTOR MAY WITHDRAW THE THING OR THE
SUM DEPOSITED, ALLOWING THE OBLIGATION TO REMAIN IN FORCE.

• Observance of all the requisites of consignation operates as a valid

payment; hence, the debtor can move for the cancellation of the obligation
by the court.
• The Debtor may withdraw as a matter of right the thing or sum deposited:
1. Before the creditor has accepted the consignation or
2. Before a judicial declaration that the consignation has been properly
made, as he is still the owner of the same.
(The obligation remains in force and all expense are paid by the
debtor)

ARTICLE 1261

IF THE CONSIGNATION HAVING BEEN MADE, THE CREDITOR SHOULD

AUTHORIZE THE DEBTOR TO WITHDRAW THE SAME, HE SHALL LOSE
EVERY PREFERENCE WHICH HE MAY HAVE OVER THE THING. THE CO –
DEBTORS, GUARANTORS, and SURETIES SHALL BE RELEASED.

• Creditors shall lose every preference which he may have over the thing,
and the co – debtors, guarantors, and sureties shall be released should the
creditor authorize the debtor to withdraw consignation.

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 • EFFECTS OF WITHDRAWAL AFTER CONSIGNATION:
1. Obligation remains.
2. Creditor loses preference over the thing.
3. Co – Debtors, Guarantors, and Sureties are released.

SECTION 2: LOSS OF THE THING DUE

ARTICLE 1262

OBLIGATION TO DELIVER SHALL EXTINGUISH THE DELIVERY OF THE

DETERMINATE THING SHALL BE EXTINGUISHED IF LOST or
DESTROYED WITHOUT THE FAULT OF THE DEBTOR, and BEFORE HE
INCURRED IN DELAY.

WHEN BY LAW OR STIPULATION, THE OBLIGOR IS LIABLE EVEN FOR

FORTUITOUS EVENTS, THE LOSS OF THE THING DOES NOT EXTINGUISH
THE OBLIGATION, AND HE SHALL BE RESPONSIBLE FOR DAMAGES. THE
SAME RULE APPLIES WHEN THE NATURE OF THE OBLIGATION
REQUIRES THE ASSUMPTION OF RISK.

ARTICLE 1263

IN AN OBLIGATION TO DELIVER A GENERIC THING, THE LOSS OR

DESTRUCTION OF ANYTHING OF THE SAME KIND DOES NOT
EXTINGUISH THE OBLIGATION.

• WHAT LOSS MEANS: The specific or a generic is lost when:

1. If perishes
2. If goes out of commerce
3. If disappears in such a way that its existence is unknown or cannot
be recovered.
• EFFECTS OF LOSS
4. If a thing is specific or determinate, obligation is EXTINGUISHED
except:
a. When debtor is at fault
b. When debtor is made liable
• By provision of law
• By contractual stipulation
• Because the nature of the obligation requires the
assumption of risk on the part of the debtor
5. If the thing is generic or indeterminate thing, the obligation is not
extinguished based on the principle of genus nunquam perit – Genus
Never Perishes; Except:
a. If generic thing is delimited
• Example: 50 kilos of mango harvest this summer that
was completely destroyed shall extinguish obligation.
b. If generic thing has been segregated or set aside, hence, it has
become specific.
• INSTANCES WHEN LAW RENDERS LIABILITY DESPITE FORTUITOUS
EVENT:
6. When debtors is in default
7. When debtor promised to deliver the same thing to 2 or more
persons who do not have the same interest
8. When obligation arises from a crime
9. When payee in solution indibiti is in bad faith.

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ARTICLE 1264

THE COURT SHALL DETERMINE WHETHER UNDER THE

CIRCUMSTANCES, THE PARTIAL LOSS OF THE OBJECT OF THE
OBLIGATION IS SO IMPORTANT AS TO EXTINGUISH THE OBLIGATION.

• PARTIAL LOSS – a portion of the thing is destroyed or lost or when it

suffers depreciation or deterioration. It is equivalent to difficulty in
performance in obligations to do.
• In partial and in case of agreement of the parties, the court will decide
whether partial loss is such as to equivalent to complete or total loss.

ARTICLE 1265

WHENEVER THE THING LOST IN THE POSSESSION OF THE DEBTOR, IT

SHALL BE PRESUMED THAT TH ELOSS WAS DUE TO HIS FAULT, UNLESS
THERE IS PROOF TO THE CONTRARY AND WITHOUT PREJUDICE TO THE
PROVISION OF ARTICLE 1165. THE PRESUMPTION DOES NOT APPLY IN
CASE OF EARTHQUAKE, FLOOD, STORM, OR OTHER NATUR AL
CALAMITY.

• Disputable presumption of fault whenever the thing to be delivered is lost

in the possession of the debtor.

• Presumption is reasonable because the debtor who has custody and care of
the thing, can easily explain the circumstance of the loss.

• Under third paragraph of Article 1165; the obligor who is not at fault is
liable in case he is guilty of delay or has promised to deliver it 2 or more
person with different interest.

• THE PRESUMPTION DOES NOT APPLY IN CASE OF EARTHQUAKE, FLOOD,

STORM, OR OTHER NATURAL CALAMITY.

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

• The impossibility or performance will result in the extinction of the

obligation.

• KINDS of IMPOSSIBILITY:

1. PHYSICAL IMPOSSIBILITY – In purely personal obligation, when

the personal qualification of the obligor are involved. Example: when
the obligor dies.
2. LEGAL IMPOSSIBILITY - when the obligation cannot be
performed because it was rendered impossible by the provision of
law, although physically it may be possible of performance.

• The article makes express reference to obligations to do or positive

personal obligation.

ARTICLE 1267

WHENEVER THE SERVICE AS BECOME SO DIFFICULT AS TO BE

MANIFESTLY BEYOND THE CONTEMPLATION OF THE PARTIES, THE
OBLIGOR MAY ALSO BE RELEASE IN PART OR IN FORM.

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 • Applicable to obligations to do (positive personal obligation) and obligation
to give (real obligation)

• When the performance of the obligation has become so difficult as to be

manifestly beyond the contemplation of both parties, the court is
authorized to release the obligor in whole or in part.

ARTICLE 1268

WHEN THE DEBT OF A THING CERTAIN AND DETERMINATE PROCEEDS

FROM A CRIMINAL OFFENSE, THE DEBTO SHALL NOT BE EXEMPTED
FROM THE PAYMENT OF ITS PRICE, WHATEVER MAY BE THE CAUSE OF
THE LOSS, UNLESS THE THING HAVING BEEN OFFERED BY HIM TO THE
PERSON WHO SHOULD RECEIVE IT, THE LATTER REFUSED WITHOUT
JUSTIFICATION TO ACCEPT IT.

• Another instance where a Fortuitous event does not exempt a debtor form
liability.

• The obligation subsist except when the creditor refused to accept the thing
without justification, after it had been offered to him.

• Consignation is not necessary but the debtor must exercise due diligence.

ARTICLE 1269

THE OBLIGATION HAVING BEEN EXTINGUISHED BY THE LOSS OF THE

THING; THE CREDITOR SHALL HAVE ALL THE RIGHTA OF ACTON WHICH
THE DEBTOR MAY HAVE AGAINST THIRD PERSONS BY REASON OF THE
LOSS.

• The creditor is given the right to proceeds against the third person
responsible for the loss.

• No need for assignment by the debtor.

SECTION 3

CONDONATION OR REMISSION OF THE DEBT (1270 – 1274)

ARTICLE 1270
Condonation or remission is essentially gratuitous, and requires the
acceptance by the obligor. It may be made expressly or impliedly.
One and the other kind shall be subject to the rules which govern inofficious
donations. Express condonation shall, furthermore, comply with the forms of
donation.

• CONDONATION or REMISSION – gratuitous abandonment by the creditor

of his right against the debtor. It is thus a form of Donation.

• REQUISITES OF CONDONATION or REMISSION:

1. There must be an agreement
2. The parties must be capacitated to give consent and must actually
consent.
3. There must be a subject matter.
4. The cause of consideration must be liberality or generosity.
5. The obligation must be demandable at the time of remission.
6. The remission must be inofficious

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 .
• CLASSES OF REMISSION
7. As to effect or extend
▪ Total – entire debt is remitted
▪ Partial – Only a portion of debt is remitted
8. As to Date of Effectivity
▪ Inter Vivos – Takes effect during lifetime of creditor/donor
▪ Mortis Causa – takes effect after the death of creditor donor
9. As to Form
▪ Implied or Tacit – Conduct is sufficient ; No formality is
required
▪ Express or Formal – If inter vivos, the formalities of donation
are required; if mortis cause – those of a will.

ARTICLE 1271
The delivery of a private document evidencing a credit, made voluntarily by
the creditor to the debtor, implies the renunciation of the action which the
former had against the latter.
If in order to nullify this waiver it should be claimed to be inofficious, the
debtor and his heirs may uphold it by proving that the delivery of the
document was made in virtue of payment of the debt.
• Presumption in case of voluntary delivery of document of indebtedness by
the creditor:

10.Presumption of implied Remission – the article is implied or tacit

remission; if the debt is not yet paid, the creditor would need the
document to enforce payment. In case he voluntarily delivers it to
the debtor, the only logical inference is that he is renouncing his
right.

11.Contrary Evidence – the presumption is prima facie or rebuttable

contrary evidence.

12.Extent of remission – if the obligation is joint, the presumption of

remission pertains only to the share of the debtor who is in
possession of the document; if solidary, to the total obligation.

13.Presumption applicable only to the private document – the legal

presumption of remission does not apply in case of public document
because it is easy to obtain a copy of the same being a public record.

• In the Second paragraph, the renunciation of the action which the creditor
had against the debtor may be nullified or invalidated by showing that the
waiver is INOFFICIOUS. Waiver becomes NULL and VOID.
Article 1272.
Whenever the private document in which the debt appears is found in the
possession of the debtor, it shall be presumed that the creditor delivered it
voluntarily, unless the contrary is proved.
• PRIVATE DOCUMENTS IN POSSESSION OF THE DEBTOR:
▪ Implies renunciation (if voluntary given or in possession of
the debtor)
Article 1273.
The renunciation of the principal debt shall extinguish the accessory
obligations; but the waiver of the latter shall leave the former in force.

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 • PRINCIPAL and ACCESSORY
▪ Renunciation of Principal affects accessory but not the other way
around.
Article 1274.
It is presumed that the accessory obligation of pledge has been remitted
when the thing pledged, after its delivery to the creditor, is found in the
possession of the debtor, or of a third person who owns the thing.
• In the contract of pledge, it is necessary that the thing pledged be in the
possession of the creditor or of a third person by common agreement.

• If the thing pledged is found in the hands of the debtor or third person, only
the accessory obligation of pledged is presumed remitted, not the
obligation itself.

SECTION 4

CONFUSION or MERGER OF RIGHTS

Article 1275.
The obligation is extinguished from the time the characters of creditor and
debtor are merged in the same person.
• CONFUSION OR MERGER OF RIGHTS – is the meeting in one person of the
qualities of the creditor and debtor with respect to the same obligation.

• Example:
o A executed a negotiable promissory note in favor of B for P
100,000.00 as payment for his (A) debt. B endorsed the note to C, C
to D, D to E, and E to A.
o Here, A the principal debtor becomes the creditor hence the
obligation is extinguished by confusion or merger of rights.

• REQUISITES OF A VALID MERGER:

1. It should take place between the principal debtor and creditor.
2. It must be clear and definite.
3. Obligation involved must be the same or identical.
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.
• Merger extinguished the obligation. Hence the accessory obligation of
guaranty is also extinguished in accordance with the principle that
ACCESSORY FOLLOWS PRINCIPAL.

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.
• CONFUSION IN A JOINT OBLIGATION – In joint obligations, there are as
many debts as creditors. Confusion or merger extinguishes the obligation
corresponding to the creditor or debtor in whom the two characters
concur.

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 • CONFUSION IN SOLIDARY OBLIGATION – It shall extinguish the entire
obligation because merger in the person of one solidary debtor is also a
merger in the other solidary debtors.

SECTION 5

COMPENSATION

Article 1278
Compensation shall take place when two persons, in their own right, are
creditors and debtors of each other.
• COMPENSATION – is a sort of balancing between two obligations; it
involves a figurative operation of weighing two obligations simultaneously
in order to extinguish them to the extent in which the amount of one is
covered by the other.

• COMPENSATION VS PAYMENT:
1. Compensation allows partial extinguishment, payment does not
allow since payment needs to be complete and indivisible as a rule.
2. Compensation (legal) takes place by operation of law; payment
requires action or delivery.

• COMPENSATION vs MERGER:
3. As to persons – Compensation (2 persons mutually debtor and
creditor to each other) Confusion (only one person to whom the
qualities of debtor and creditor is merged)
4. As to number of Obligations – Compensation (2 obligations)
Confusion (one obligation)

• CLASSIFICATION OF COMPENSATION
5. As to Effect or Extent:
▪ Total – both obligation are extinguished because they are of
equal amounts
▪ Partial – Only one is extinguished and one with larger debt
remains
6. As to Origin or Cause:
▪ Legal – by operation of law
▪ Voluntary or Conventional – agreement of parties
▪ Judicial – can be made effective by court order
▪ Facultative – Only one party may claim compensation.
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 of the other;
(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;
(3) That the two debts be due;

(4) That they be liquidated and demandable;

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(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 1280
Notwithstanding the provisions of the preceding article, the guarantor may
set up compensation as regards what the creditor may owe the principal
debtor.
• Guarantor may set up compensation as regards what the creditor may owe
the principal debtor.
• Example:
o A owes B P 100,000.00 guaranteed by C. B owes A P 75,000.00. on
due date A could not pay B because he is insolvent.
o C the guarantor will be liable for only P 25,000.00. He can set up
compensation as regards what B creditor owes A.
Article 1281
Compensation may be total or partial. When the two debts are of the same
amount, there is a total compensation.
Article 1282
The parties may agree upon the compensation of debts which are not yet due.
• This is an exception to the general rule that only debts which are due and
demandable can be compensated.

• Voluntary or Conventional Compensation takes place by agreement even if

requisites of legal compensation is not present.
Article 1283
If one of the parties to a suit over an obligation has a claim for damages
against the other, the former may set it off by proving his right to said
damages and the amount thereof.
• JUDICIAL COMPENSATION – takes place when so declared by final
judgment or by a court in a suit.

• A party may set off his claim for damages against his obligation to the
other party by proving his right to said damages and the amount thereof.
Article 1284
When one or both debts are rescissible or voidable, they may be compensated
against each other before they are judicially rescinded or avoided.
• COMPENSATION OF RESCISSIBLE or VOIDABLE DEBTS – Rescissible (art.
1381) and voidable obligations (Art. 1390) are valid until they are
judicially rescinded or avoided. Prior to rescission or annulment, debts
may be compensated against each other.

Article 1285
The debtor who has consented to the assignment of rights made by a creditor
in favor of a third person, cannot set up against the assignee the
compensation which would pertain to him against the assignor, unless the
assignor was notified by the debtor at the time he gave his consent, that he
reserved his right to the compensation.
If the creditor communicated the cession to him but the debtor did not
consent thereto, the latter may set up the compensation of debts previous to
the cession, but not of subsequent ones.
If the assignment is made without the knowledge of the debtor, he may set up
the compensation of all credits prior to the same and also later ones until he
had knowledge of the assignment.

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Article 1286
Compensation takes place by operation of law, even though the debts may be
payable at different places, but there shall be an indemnity for expenses of
exchange or transportation to the place of payment.
• This article is about Legal Compensation
• The Indemnity contemplated is not about the difference in the value of the
things in their respective places BUT to the expenses of monetary
exchange (in money debt) and Transportation (in things to be delivered)
Article 1287
Compensation shall not be proper when one of the debts arises from a
depositum or from the obligations of a depositary or of a bailee in
commodatum.
Neither can compensation be set up against a creditor who has a claim for
support due by gratuitous title, without prejudice to the provisions of
paragraph 2 of article 301.
Article 1288
Neither shall there be compensation if one of the debts consists in civil
liability arising from a penal offense.
• INSTANCES WHEN LEGAL COMPENSATION IS NOT ALLOWED:
1. When one of the debts arises from depositum
▪ Deposit – constituted from the moment a person receives a
thing belonging to another with the obligation of safely
keeping it and returning the same.
2. Where one of the debts arises from commudatum
▪ Commudatum – gratuitous contract whereby one of the
parties delivers to another something not consumable so that
the latter may use the same for a certain time and return it
after use.
3. When one of the debts arises from a claim for support due by
gratuitous title.
4. Where one of the debts consists in civil liability arising from a penal
offense.
Article 1289
If a person should have against him several debts which are susceptible of
compensation, the rules on the application of payments shall apply to the
order of the compensation.
• COMPENSATION is similar to payment.

• If debtor has various debts susceptible of compensation, he must inform

the creditor which of them is the subject of compensation.

• If he fails to do so, compensation applies to the most onerous.

Article 1290
When all the requisites mentioned in article 1279 are present, compensation
takes effect by operation of law, and extinguishes both debts to the
concurrent amount, even though the creditors and debtors are not aware of
the compensation.
• CONSENT NOT required in legal compensation.

• LEGAL COMPENSATION takes place automatically by operation of law,

thus full capacity of the parties is not required.

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 SECTION 6

NOVATION

Article 1291
Obligations may be modified by:

(1) Changing their object or principal conditions;

(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor.
• NOVATION – is the substitution or change of an obligation by another which
extinguishes or modifies the first.

• How novation is effected:

1. Changing the object or principal condition
2. Substituting another in place of the debtor
3. Subrogating a third person in the rights of the creditor.

• DUAL FUNCTION OF NOVATION

4. It extinguishes an obligation.
5. It creates a new one in lieu of the old.

• KINDS OF NOVATION
6. As to object or purpose:
a. Real or Objective – the object or principal conditions of the
obligations are changed.
b. Personal or Subjective – the person or persons of the
obligations are changed.
c. Mixed – the object and parties are changed.

7. As to form:
a. Express – Novation is declared in unequivocal terms.
b. Implied – Novation where the old and the new obligations are
incompatible with each other.

• REQUISITES OF NOVATION:
8. Existence of a valid obligation.
9. Intent to extinguish or to modify the old obligation.
10.Capacity and consent of the parties.
11.Validity of the new obligation.

Article 1292
In order that an obligation may be extinguished by another which substitute
the same, it is imperative that it be so declared in unequivocal terms, or that
the old and the new obligations be on every point incompatible with each
other.
• NOVATION is NOT PRESUMED

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 • It must be clearly and unmistakably established either by the express
agreement or the parties or acts of equivalent import or by the
incompatibility of the 2 obligations with each other in every material
respect.

• TEST OF INCOMPATIBILITY:

o The test is whether they can stand together each one having an
independent existence.
Article 1293
Novation which consists in substituting a new debtor in the place of the
original one, may be made even without the knowledge or against the will of
the latter, but not without the consent of the creditor. Payment by the new
debtor gives him the rights mentioned in articles 1236 and 1237.
• KINDS OF PERSONAL NOVATION:
1. SUBSTITUTION – when the person of the debtor is substituted.

▪ KINDS:

o EXPROMISSION – takes place when a third person of

his own initiative and without the knowledge or will of
the original debtor assumes the latter’s obligation with
the consent of the creditor.
o It logically requires the consent of the Third
Person and Creditor.
o It is essential that the old debtor be release from
obligation, otherwise there is no expromission.

o DELEGACION – takes place when the creditor accepts a

third person to take place of the debtor at the instance
of the latter. The creditor may withhold approval.

o All parties, the old debtor, the new debtor, and the
creditor must agree.

▪ In either of the two (2) modes of substitution, the consent of

the creditor is an indispensable requirement.

o The reason is that substitution implies a waiver by the

creditor of his credit and may be prejudicial to him.

▪ RIGHTS OF THE NEW DEBTOR WHO PAYS:

o In Expromission – payment by the new debtor gives him

the right to beneficial reimbursement under the second
paragraph of Article 1236.
o If the payment was made with the consent of the
original debtor or on his own behalf (delegacion), the
new debtor is entitled to reimbursement and
subrogation under Article 1237.

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 2. SUBROGATION – when a third person is subrogated in the rights of
the creditor.
Article 1294
If the substitution is without the knowledge or against the will of the debtor,
the new debtor's insolvency or non- fulfillment of the obligations shall not
give rise to any liability on the part of the original debtor.
• EFFECT OF NEW DEBTOR’S INSOLVENCY or NON – FULFILLMENT of the
OBLIGATION IN EXPROMISION.

o The new debtor’s insolvency or non – fulfillment of the obligation will

not revive the action of the creditor against the old debtor whose
obligation is extinguished by the assumption of the debt by the new
debtor.
Article 1295
The insolvency of the new debtor, who has been proposed by 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 the delegated
his debt.
▪ EFFECT OF NEW DEBTOR’S INSOLVENCY or NON – FULFILLMENT OF
OBLIGATION in DELEGACION.

o The General Rule is that OLD debtor is not liable to the creditor in
case of the insolvency of the new debtor EXCEPT:

1) At the time of delegacion, the Insolvency was already

existing and of public knowledge (although not known to
the old debtor).

2) At the time of delegacion, the Insolvency is existing and

known to the debtor (although it was not of public
knowledge).
Article 1296
When the principal obligation is extinguished in consequence of a novation,
accessory obligations may subsist only insofar as they may benefit third
persons who did not give their consent.
• EFECT OF NOVATION ON ACCESSORY OBLIGATIONS;
o The provision follows that general rule that the extinguishment of
the principal obligation carries with it that of the accessory
obligations.
o If provides however , an exception in the case of an accessory
obligation created in favor of a third person which remains in force
unless said third person gives his consent to the novation.
o A person should not be prejudiced by the act of another without his
consent.
Article 1297
If the new obligation is void, the original one shall subsist, unless the parties
intended that the former relation should be extinguished in any event.
• EFFECT WHERE THE NEW OBLIGATION IS VOID:

3. In Article 1297 stresses that one of the essential requirements of a

novation is that the NEW OBLIGATION must be VALID.

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 4. The General rule is that there is NO novation if the new obligation is
void and therefore the original one shall subsist for the reason that
the second obligation being inexistent, it cannot extinguish or
modify the first.

• EFFECT WHERE THE NEW OBLIGATION IS VOIDABLE:

5. If the new obligation, novation may take place unless and until the
new obligation is annulled.
Article 1298
The novation is void if the original obligation was void, except when
annulment may be claimed only by the debtor or when ratification validates
acts which are voidable.
• EFFECT WHERE THE OLD OBLIGATION IS VOID or VOIDABLE

1. An original void obligation cannot be novated because there is

nothing to novate.
2. However, if the original obligation is only voidable (valid until
annulled) or a voidable obligation is validated by ratification, the
NOVATION IS VALID.
Article 1299
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.
• IF the first obligation is subject to a Suspensive or Resolutory condition,
the second obligation is deemed subject to the same condition unless the
contrary is stipulated by the parties in their contract.
Article 1300
Subrogation of a third person in the rights of the creditor is either legal or
conventional. The former is not presumed, except in cases expressly
mentioned in this Code; the latter must be clearly established in order that it
may take effect.
• SUBROGATION – is the substitution of one person (subrogee) in the place of
the creditor (subroger) with reference to the lawful claim or right, giving
the subrogee all the rights or the subroger, including the right to employ
remedies to enforce payment.

• KINDS OF SUBROGATION:

3. CONVENTIONAL – takes place by express agreement of the original

parties (debtor and original creditor) and the third person.

▪ Must be clearly established to take place.

4. LEGAL – when it takes place without agreement but by operation of

law.

▪ Is not presumed except in cases expressly provided by law.

Article 1301

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 Conventional subrogation of a third person requires the consent of the
original parties and of the third person.
• C O N S E N T O F A L L PA R T I E S R E Q U I R E D I N C O N V E N T I O N A L
SUBROGATION.

1. The debtor – because he becomes liable to the new creditor under the
new obligation.
2. The old creditor -because his right against the debtor is
extinguished.
3. The new creditor – because he may dislike or distrust the debtor.

Article 1302.
It is presumed that there is legal subrogation:
(1) When a creditor pays another creditor who is preferred, even without
the debtor's knowledge;
(2) When a third person, not interested in the obligation, pays with the
express or tacit approval of the debtor;
(3) When, 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.
• CASES OF LEGAL SUBROGATION: In the three cases, subrogation takes
place by operation of law even without the consent of the parties. Note that
subrogation is produced from payment:

4. When the creditor pays another creditor who is preferred.

5. When a third person without interest in the obligation pays with the
approval of the debtor.
6. When a third person with the interest in the obligation pays even
without the knowledge of the debtor.
Article 1303
Subrogation transfers to the persons subrogated the credit with all the rights
thereto appertaining, either against the debtor or against third person, be
they guarantors or possessors of mortgages, subject to stipulation in a
conventional subrogation.
• The effect of legal subrogation is to transfer to the new creditor the credit
and all the rights and actions that could have been exercised by the former
creditor against the debtor or the third persons, be they are guarantors or
mortgagors.

• Effects of legal subrogation may not be modified by agreement.

Conventional subrogation are governed by stipulations of the parties.
Article 1304
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 of the same credit.
• The creditor to whom partial payment has been made by the new creditor
remains a creditor to the extent of the balance of the debt.

• In case of insolvency of the debtor, he is given preferential right under the

above article to recover the remainder against the new creditor.

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 Directions: In your Simplified Law on Obligations and Contracts by Ballada, et. al., 2020 Issue -
3rd Edition, please answer pages 197-199 & 208-211, respecively and write your answers in
the spaces provided herein.

Pages 197-199 Pages 208-211

Multiple Choice Multiple Choice

1. ____ 1. _____


2. ____ 2. _____


3. ____ 3. _____


4. ____ 4. _____


5. ____ 5. _____


6. ____ 6. _____


7. ____ 7. _____


8. ____ 8. _____


9. ____ 9. _____


10.____ 10. _____


11.____ 11. _____


12.____ 12. _____


13.____ 13. _____


14.____ 14. _____


15.____ 15. _____

References

Ballada, et. al (2020) Law on Obligations and Contracts, Sampaloc, Manila, PH: Dynasty
Booksource Asia.

Hector S. De Leon (2020). Law on Obligations and Contracts.CM Recto Avenue, Manila PH: REX
Book Store.

COMLAW1: Law on Obligations and Contracts Module 4 | Page 29