CHAPTER 4: EXTINGUISHMENT OF OBLIGATIONS

Note: a person pays a pre-existing obligation. If no such obligation exists,

strictly speaking there is no payment

Article 1231
Obligations are extinguished:
(1) By payment or performance:
(2) By the loss of the thing due:
(3) By the condonation or remission of the debt;
(4) By the confusion or merger of the rights of creditor and
debtor;
(5) By compensation;
(6) By novation.
Other causes of extinguishment of obligations, such as
annulment, rescission, fulfillment of a resolutory condition, and
prescription, are governed elsewhere in this Code.

Contemplates on how obligations are extinguished

Ordinary classification of this Code:
1. Payment or performance
2. Loss of the thing due
3. Condonation or remission of the debt
4. Confusion or merger
5. Compensation
6. Novation
Other causes mentioned but governed by other chapters of
the code:
1. Rescission
2. Annulment
3. Fulfillment of resolutory condition
4. Prescription
Other contemplated causes
1. Death of a party in case the obligation is personal
2. Resolutory term obligation ceases upon arrival of
term
3. Change of civil stutus
4. Compromises
5. Mutual dissent both parties refuse to go ahead with
the contract
6. Impossibility of fulfillment
7. Fortuitous event

Take note: upon death of a person criminally liable, his civil liability is not
automatically extinguished. This is supported by Article 19, 20, and 21 of
the civil code which states that the accused would be civilly liable
independently of the criminal liability for which he can be held liable.
This civil liability exists despite death prior to final judgment of
conviction.
PAYMENT OR PERFORMANCE
Article 1232
Payment means not only the delivery of money but also the
performance, in any other manner, of an obligation.

Payment
Mode of extinguishing obligations which consists of:
o
Delivery of money
o
Performance in any other manner of an obligation
(ex. Rendition of required service)
This embraces all performance of an obligation, regardless of
whether the obligation is REAL or PERSONAL
1

For a payment to properly exist, the creditor has to ACCEPT

the same, EXPRESSLY or IMPLIEDLY
Effect of payment made under a void judgment: payment
made thereunder is also void

Article 1233
A 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.

Contemplates on the requisites for a valid payment:

o
The very thing or service contemplated should be
paid
o
Fulfillment must be complete
Payment or performance must be complete to result to
extinguishment
Partial payment of debtor may be a ground for the creditor to
refuse such payment

Q: how is payment or performance made?

A:
a. If monetary obligation delivery of money. Must be paid in
full unless otherwise stipulated in contract
indebtedness unconditional and legally enforceable
obligation for the payment of money
b. Delivery of the thing or things
c. Performance of said personal undertakings
d. If debt is not doing of something by refraining from doing
the action
Burden of Proof:
a. Creditor should prove that a valid debt exist
b. Debtor (upon proof of the existence of a valid debt) should
prove that debt has been paid
Note: the best means of proving payment is through presenting
RECEIPTS (note also of presumptions provided for in Article 1176 on
interests and installments)
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.

Substantial performance or compliance is, in a sense, a

performance according to the fair intent of the contract, with
an attempt in good faith to perform
Such rule is adopted from the American law: in case of
substantial performance, the obligee is benefited

Note: the liability of the debtor for damages suffered by the creditor in
case of substantial performance does not arise under the conditions set
forth in article 1235.
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.
angels notes
OBLIGATIONS & CONTRACTS
Paras and Atty. Valencias Class Discussion

Contemplates on QUALIFIED ACCEPTANCE of INCOMPLETE or

IRREGULAR PAYMENT
When the obligee accepts the performance, knowing its
incompleteness or irregularity, and without expressing any
protests or objection, the obligation is deemed fully complied
with
Reason behind Provision: the presence of WAIVER and
ESTOPPPEL on the creditors part
What may the creditor do? refuse to accept; make a timely
objection to the incompleteness or irregularity

EXCEPTIONS to the GR that you cannot compel creditor to accept partial

payment:
a. When a creditor knowingly accepts incomplete payment
without objection
Requisites:
o
The obligee accepts the incomplete payment
o
Oblige knows its incompleteness
o
Creditor did not register his objection or protest
(principle of waiver)
b. In case of substantial compliance in good faith
Accept means to take a satisfactory or sufficient, or agree to an
incomplete or irregular performance

b.
c.
d.

SCs ruling on this article:

1. As to whether or not payment by a third person really
benefitted the debtor is a matter to be brought up by the
debtor and not the creditor
2. Once the creditor has accepted payment form a stranger, it
cannot later or require the permission of the debtor to the
payment
3. If the stranger pays with the knowledge of the debtor who
keeps quiet and does not object, it is as if the debtor had
really consented. The debtor is not allowed to protest long
after the payment
Note: the knowledge of the debtor that someone is paying for him
can be proved INFERENTIALLY and by his CONDUCT
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, guaranty, or penalty.

Note However: receipt for a partial payment does not necessary

acquiesce to such incomplete payment
Article 1236
The creditor is not bound to accept payment or performance by a
third person who has no interest in the fulfillment of the obligation, unless
there is a stipulation to the contrary.

When debt has been completely remitted

When debt has already been paid
When legal compensation had already taken place

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 rising from a
mortgage, guaranty, or penalty

Subrogation act of putting somebody into the shoes of the creditor,

hence, enabling the former to exercise all the rights and action that
could have been exercised by the latter
Article 1238

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.

Contemplates on the thought that the creditor can refuse

payment by a stranger (3rd person) excepts:
o
If there is a stipulation allowing this
o
If 3rd person has an interest in the fulfillment of the
obligation (co-debtor, guarantor, joint debtor)
Reason for this provision:
o
Creditor should have a right to insist on the liability
of the debtor
o
Creditor should not be compelled to accept
payment from a third person whom he may dislike
or distrust

Payment by a Third Person (the third person may pay)

a. With the KNOWLEDGE and CONSENT of the DEBTOR here
the payor is entitled to FULL REIMBURSEMENT and
SUBROGATION of such rights as guaranty, penal clause, or
mortgage
b. WITHOUT the debtors KNOWLEDGE or AGAINST his will
payor is NOT entitled to SUBROGATION but he is entitled of
BENEFICIAL REIMBURSEMENT
Note: other instance when recovery can be had from the creditor and
not from the innocent debtor:
a. When the debt has prescribed
2

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.

Payment made by a third person who does not intend to be

reimburse by the debtor is deemed to be a DONATION, which
requires the debtors consent
Acceptance and consent on the side of the donee is needed
because no one is compelled to accept a donation
Note: payment is in any case valid as to the creditor who
accepted it

Article 1239
In obligations to give, payment made by one who does not have
the free disposal of the thing due and capacity to alienate it shall not be
valid, without prejudice to the provisions of Article 1427 under the Title on
"Natural Obligations."

Contemplates on payment made BY an INCAPACITATED

person

GR: if person has no capacity to give:

a. Payment is not valid if accepted
b. Creditor cannot even be compelled to accept it
c. The remedy of consignation would not be proper
Exception: Article 1427
angels notes
OBLIGATIONS & CONTRACTS
Paras and Atty. Valencias Class Discussion

When a minor between eighteen and twenty one years of age,

who has entered into a contract without the consent of the parents or
guardian voluntarily pays a sum of money or delivers a fungible thing in
fulfillment of an obligation, there shall be no right to recover the same
from the obligee who has spent or consumed it in good faith

Related to 1239: paid by an incapacitated person (debtor);

Payment to INCAPACITATED
Valid only if:
a. Incapacitated person has kept the thing delivered
b. Insofar as the payment has been beneficial to him

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.

Its not always the creditor whose the obligation has been
constituted because there are certain stipulations in the
contract pour autrui (ex. Make a contract agreeing giving a car
to a third person (for her favor))
o There are also assignees persons whom in whose
favor a certain right have been transferred. When the
creditor no longer wants to be a creditor, he can sell
or assign that credit to another person.
o The law provides for another person who is authorize
to receive the credit (ex. Administrator of an estate;
guardian of a minor; sheriff in garnishments;
liquidator of a corporation during the pendency of it
closure)
Contemplates on to whom the payment must be made:
o
To the person in whose favor the obligation has
been constituted (CREDITOR at the time of
payment, not the original creditor at the time the
obligation was constituted)
o
The successor-in-interest (heirs)
o
To any person authorized to receive it
(authorization may be through agreement or by
law)
Exception to this article: 1241 and 1242

Note: if the recipient was NOT AUTHORIZED, the payment generally is

NOT valid.
If the money is paid to the wrong party in good faith, the debt is NOT
EXTINGUISHED. Moreover, the obligation carries with it the payment of
interest and the interest continues to run.

Note: the one who made the payment has the burden of proving that it
benefited the incapacitated payee. Follow the rules of evidence in
proving (governed by the rules of court)
Benefit may be FINANCIAL, MORAL, or INTELLECTUAL but it must be
proved
Q: What happens if indeed there has been no benefit, what remedy is
given?
A: The payment is NOT valid; therefore, the legal representative of the
incapacitated person can demand a new payment on behalf of his ward.
The ward himself, should he regain capacity is allowed to claim a new
payment.
Payment to a THIRD PARTY (dont have to prove the benefit at all times)
Valid only to the extent of benefit (FINANCIAL, MORAL or
INTELLECTUAL) to the creditor
Payment must be proved and is not presumed except:
o
If after the payment the third person acquires the
creditors rights
o
If the creditor ratifies (to condone or allow; it
happens after the receipt) the payment to the third
person the defect is cured (authority came after
the third person acquired the money: correction;
even if it did not really redounded to the benefit of
the creditor)
o
If by the creditors conduce, the debtor has been
led to make the payment case of ESTOPPEL
(negligence of the creditor causing the incident to
happen)
Article 1242
Payment made in good faith to any person in possession of the
credit shall release the debtor.

Why? Payment to an unauthorized agent is at the risk of the payor.

Article 1241

Payment to a person who is incapacitated to administer his

property shall be valid if he has kept the thing delivered, or insofar as the
payment has been beneficial to him.
Payment made to a third person shall also be valid insofar as it
has redounded to the benefit of the creditor. Such benefit to the creditor
need not be proved in the following cases:
(1) If after the payment, the third person acquires the creditor's
rights;
(2) If the creditor ratifies the payment to the third person;
(3) If by the creditor's conduct, the debtor has been led to believe
that the third person had authority to receive the payment.

Contemplates on payment to INCAPACITATED person and

UNAUTHORIZED third person
only applies to obligation to give (kept the thing delivered)
3

a.
b.

Speaks of an extinguishment by payment where payment was

not made on the people contemplated in 1240, rather to the
person in possession in credit
Ex. the debtor paid to a person who is no longer the owner of
the credit is valid, as long as it is done in good faith.
The debtor paid to the assignee not knowing that the deed of
assignment was void, is still considered valid, as long as it is
done in good faith
Keyword is GOOD FAITH (will extinguish the obligation)
Refers to the person who possess the credit not the evidence
of credit
Requisites:
Payment by payor must be MADE IN GOOD FAITH (this is
presumed)
The payee must be in POSSESSION OF THE CREDIT ITSELF (not
merely the document evidencing the credit)
Ex. Promissory not payable to bearer and not to a
specific person

angels notes
OBLIGATIONS & CONTRACTS
Paras and Atty. Valencias Class Discussion

Credit is an invisible right which is represented by a document which is

the evidence of credit
Note: thus you should pay to the person who has the AUTHORITY to
possess the document

In case there is another agreement resulting in

either DATION of payment or NOVATION
In case of WAIVER by the creditor

Article 1245
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.

Payment made to the creditor by the debtor after the latter

has been judicially ordered to retain the debt shall NOT be
valid
If the court orders you not to pay, do not pay!
Serves as a warning. If you disobey, you are penalize by your
own action

Judicial Order may have been prompted by an order of ATTACHMENT,

INJUNCTION, or GARNISHMENT

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.

Dation in Payment mode of extinguishing an obligation whereby the

debtor alienates in favor of the creditor, property for the satisfaction of
monetary benefits (giving of a particular object in payment of a debt
which is monetary)
In order to be valid, should require the consent of the creditor
Ex. To pay my debt of 1,000,000 in favor of Bella, I gave her with her
consent a diamond ring instead worth 1,000,000.
-

Garnishment proceeding by which a debtors creditor is subjected to

the payment of his own debt to another
Ex. A owes B 1,000,000. B, in turn owes C 100,000. C Brings action
against B, however, B cannot pay but admits the credit which he has
over A. The debt here can be garnished thus A should not pay B, and
instead he should pay C. Any payment made by A to B in the meantime
is considered invalid under the law.
Note: payment to the garnishing creditor is given to the CLERK, SHERIFF
or other proper officer of the court.
Interpleader an action in which a certain person in possession of
certain property wants claimants to litigate among themselves for the
same.
Ex. A is to deliver goods to the person who presents the proper receipt.
B and C both have the same kind of receipt. A should go to court to
settle their conflicting rights. Court then will issue an order prohibiting
payment to either B or C. Any payment made to one during the
pendency is NOT valid.
Injunction judicial process by virtue of which a person is generally
ordered to REFRAIN from doing something
Ex. A owes B 500. When he is about to pay B, Bs relatives move to stop
the payment on the ground that B is insane. Relatives can go to court to
seed a writ of preliminary injunction. Payment despite such will be
INVALID.
Article 1244
The debtor of a thing cannot compel the creditor to receive a
different one, although the latter may be of the same value as, or more
valuable than that which is due.
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.

Only applies to determinate objects

Debtor cannot compel creditor to accept a DIFFERENT object
although such object is of the same value or higher
Exceptions (inapplicability of Article 1244):
o
In case of FACULTATIVE obligations
4

In dation the obligation is originally in money; however in

facultative you can substitute anything with anything
Novation results from an extinguishment of the old
obligation and arising of a new obligation
Dation is an example of novation but is considered as
payment (it may also be called a novation but the difference is
that dation is a form of payment)
Dation of payment shall be governed by the law on sales

Q: Why is Dation in Payment governed by the Law of sales?

A: because it really partakes in one sense of the nature of sale. Creditor
is really buying property from debtor, payment for which is to be
charged against the debtors debt. However, it may also be called a
novation.
Note: sales and novation require COMMON consent
SALE vs. DATION IN PAYMENT
SALE
- There is NO pre-existing credit
- This gives RISE to obligations
- The cause or consideration here
is the PRICE (seller); or the
OBTAINING of the object
(buyer)
- There is greater freedom in the
determination of the price
- The giving of the price may
generally end the obligation of
the buyer

DATION
- There is a pre-existing credit
- This EXTINGUISHES obligations
- The cause or consideration here
is the EXTINGUISHMENT OF
DEBT
(debtor)
and
the
ACQUISITION OF THE OBJECT
offered in credit (creditor)
- There is less freedom in
determining the price
- The giving of the object may
extinguish COMPLETELY or only
PARTIALLY the credit

CONDITIONS UNDER WHICH A DATION IN PAYMENT WOULD BE VALID:

1. If the Creditor CONSENTS
2. If the dation in payment will NOT PREJUDICE the other creditors
3. If the debtor is NOT JUDICIALLY declared insolvent
Article 1246
When the obligation consists in the delivery of an indeterminate
or generic thing, whose quality 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.

Contemplates on an obligation to give a GENERIC thing

If the contract does not specify the quality:
angels notes
OBLIGATIONS & CONTRACTS
Paras and Atty. Valencias Class Discussion

Creditor cannot demand a thing of superior quality (but

if he desires, he may demand and accept one of inferior
quality)
o
Debtor cannot deliver a thing of inferior quality, but if he
so desires, he may deliver one of superior quality
(provided it is not of a different kind)
Give the ordinary quality

Q: When is a contract void?

A: When the KIND and QUANITITY cannot be determined without need
of a new agreement of the parties.
Note: the object of every contract must be determinate as to its kind.
Quantity is not an obstacle to the validity of the contract provided it is
possible to determine the same without the need of a new contract
between parties.

The payment of debts in money shall be made in the currency

stipulated, and if it is not possible to deliver such currency, then in the
currency which is legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of
exchange or other mercantile documents shall produce the effect of
payment only when they 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 the abeyance.

Article 1247
Unless it is 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.

GR: the debtor has to pay for the extrajudicial expense

incurred during the payment
Reason for the law: it is the debtor who benefits primarily,
since his obligation is thus extinguished
Generally, costs shall be awarded to the winning party
Generally, no costs against the government, unless otherwise
provided by law

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 waiting for the liquidation of the latter.

Contemplates on the fact that performance should generally

be complete
Third exception to article 1233 (1234, 1235 and 1248)
Creditor is not compelled to receive partial amount neither
may debtor be required to make partial payments
Exceptions:
o
When there is stipulation to this effect
o
When the different prestations are subject to
different terms and conditions
o
When a debt is in partial liquidated and in partial
unliquidated, in which case performance of the
liquidated part may be insisted upon either by the
debtor or creditor (ex. 3M plus damages)
o
When a joint debtor pays his share or the creditor
demands the same
o
When a solidary debtor pays only the part
demandable
o
In case of compensation, when one debt is larger
than the other, it follows that a balance is left
o
When work is to be done by parts

Under this article payment may be either in the (1) currency

stipulated or (2) if it is not possible to deliver such currency,
then in Philippine legal tender
RA 529: all that the creditor can demand is payment in
Philippine legal tender measured at the exchange rate
prevailing at the time of contracting or incurring the debt;
illegal to demand monetary debts of currency other than that
of legal tender (money is circulation)
This article is now modified by RA 4100 which states that the
parties agreement as to currency in which an obligation will
be paid is BINDING. Further, that the conversion rate at the
time of payment of satisfaction of the Judgment is what is
applicable.
What is important here is the second paragraph: you cannot
compel a person to accept a check because payment of
monetary obligations should be in legal tender. A check is not
a legal tender. It only becomes one when it is already in
cashed

Legal Tender that which a debtor may compel a creditor to accept in

payment of the debt
Note: A check and bank managers check are not considered legal
tender.
Q: What are the instances when a check or commercial document
should be accepted as payment?
A:
a. When the creditor is in estoppels or he has previously
promised he would accept a check
b. When the check has lost its value because of the fault of the
creditor
c. When payment occurs not because of a debt but because of
the exercise of the right of conventional redemption
Note: Promissory note effect of payment will be produced only when
the note has been CASHED
Article 1250
In case an 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 payment, unless there
is an agreement to the contrary.

In case an 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 payment, unless there is an agreement to the contrary
talks about a debt to be paid by a different currency; If that is
the case the exchange rate would be the prevailing rate

Article 1249
5

angels notes
OBLIGATIONS & CONTRACTS
Paras and Atty. Valencias Class Discussion

during the time when the obligation was constituted (incase

of extraordinary inflation)

Inflation sharp sudden increase of money or credit or both without a

corresponding increase in business transaction. (value of money tends to
decrease)

Requisites for Application of Payment to Be made Use of

o
There must be two or more debts
o
Debt must be of the same kind
o
One debtor; one creditor
o
All debts must be due
o
Payment is not enough to extinguish all debts

Deflation opposite of inflation

Article 1251
Payment shall be made in the place designated in the obligation.
There being no express stipulation and if the 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.
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.

talks about the place of payment

Where payment must be made
o
If there is a stipulation in the place DESIGNATED
o
If there is no stipulation

To deliver a specific thing: in the place

where the thing might be (usually or
habitually) at the time of the obligation
was CONSTITUTED (if temporarily there,
payment should be at the domicile of the
debtor)

If generic: delivery must be made at the

domicile of the debtor
Note: Payment not at the designated place but only to the mere
depository of the creditors funds is not considered as valid
APPLICATION OF PAYMENTS

Q: Is article 1252 not applicable to debts not yet due?

A: it can but only if (1) the parties so stipulate or (2) when the
application of payment is made by the party for whose benefit the term
has been constituted
General Rule: the debtor is given by the law the right to select which of
his debts he is paying.
Exceptions:
a. If there was a valid prior but contrary agreement
b. The debtor cannot choose to pay part of the principal ahead
of the interest unless the creditor consents
c. when the application of payment is made by the party for
whose benefit the term has been constituted
Note: if the debtor makes a proper application and the creditor refused,
the creditor will be in mora accipiendi
Q: How is application of Payment made?
A:
a. The debtor makes the designation
b. If not, creditor makes it by so stating in the receipt he issues,
unless there is a cause for invalidation the contract (void
obligation, void application of payment; debtors consent in
accepting receipt is vitiated voidable)
c. If neither made the application, then application is made by
operation of law
Note: if the creditor makes the application without the knowledge and
consent of the debtor, the application is not valid
Q: Once an application of payment is made, may it be revoked?
A: NO, unless both parties agree. Even if both parties agree, revocation
will not be allowed if third persons would be prejudiced

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 must 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 made 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.

Four (4) special forms of payment

o
Application or imputation of payments
o
Dation in payment
o
Assignment in favor of creditors
o
Tender of payment and consignation

Q: What does application of payments mean?

A: It is the designation of the debt; to show which debt, out of two or
more debts owing the same creditor is being paid
6

Q: When must the application be made?

A: when payment by the debtor is made, not afterwards
-

Examples on how a creditor makes the application:

o
Debtor without protest accepts the receipt
o
Banks monthly statements (debtor signed said
statements)

Q: When can an application of Payment Cannot be Availed of?

A:
a. In the case of a PARTNER-CREDITOR
b. The right cannot be invoked by a SURETY or a SOLIDARY
GUARANTOR
Article 1253
If the debt produces interest, payment of the principal shall not
be deemed to have been made until the interests have been covered.

angels notes
OBLIGATIONS & CONTRACTS
Paras and Atty. Valencias Class Discussion

Interest must be Paid First before the Principal unless the

creditor agrees
2 types of interest contemplated by the article:
o
Interest by way of compensation
o
Interest by way of damages due to default
PURPOSE: It is beneficial to the creditor because that means
that the principal is still a substantial amount for the
succeeding days
Note: If payment is not sufficient to cover principal and interest, the
creditor can stipulate that payment to principal is first made

Article 1254
When the payment cannot be applied in accordance with the
preceding rules, or if application can not be inferred from other
circumstances, the debt which is 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 payment under the preceding rules cannot be applied, 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 the SAME nature, payment shall be
applied to all of them PROPORTIONATELY (in effect, none of
the obligations is totally extinguished)
This article contemplates payment beneficial to DEBTOR

Note: although one is more onerous, it should be noted that the debtor
cannot insist that the creditor accept a partial payment (ex. Debts are
2M and 1M)
-

Samples of more burdensome Debts

o
Older ones in case or running accounts
o
Interest bearing even if the non-interest bearing
debt is older
o
The higher interest
o
Debts secured by mortgage or by pledge
o
Debts with a penalty clause
o
Advances for subsistence are more onerous than
cash advances
o
A debt where the debtor is in more is more onerous
than one where he is not
o
An exclusive debt is more onerous that a solidary
debt

Note: the more burdensome rule does not apply when the debtor has
made application of payment
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 from responsibility 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.

Contemplates on a situation where the debtor has obligations

in favor of MANY CREDITORS
7

Cession is the process by which a debtor transfers all the

properties not subject to execution in favor of his creditors so
that the latter may sell them, and thus apply the proceeds to
their credits
Kinds or Classes of Assignment:
o
Legal
o
Voluntary (Art. 1255)
Requisites for Voluntary Assignment:
o
More than one debt and more than one creditor
o
Complete or partial insolvency of debtor
o
Abandonment of all debtors property not exempt
from execution in favor of creditors
o
Acceptance or consent on the part of the creditors
Effects of Voluntary Assignment:
o
Creditors does not become owners, they are only
assignees with authority to sell (note: if ownership
is transferred this becomes a dation in solutum)
o
Debtor is released up to the amount of the net
proceeds of the sale, unless there is a stipulation of
the contrary
o
Creditors will collect credits

CESSION vs. DACION EN PAGO

Dacion En Pago
- Does not affect ALL the
properties
- Does not require plurality of
creditors
- Only specific or concerned
creditors consent is required
- May take place during the
solvency of the debtor
- Transfer of ownership upon
delivery
- An act of novation

Cession
- In general, affects ALL the
properties of the debtor
- Requires more than 1 creditor
- Requires the consent of all
creditors
- Requires full or partial insolvency
- Does not transfer ownership
- Not an act of novation

TENDER OF PAYMENT AND CONSIGNATION

Tender of Payment (extrajudicial)
The act of offering the creditor what is due him together with
a demand that the creditor accept the same. Consists in the
manifestation made by the debtor to the creditor of his
decision to comply immediately with his obligation
Consignation (judicial)
The act of depositing the thing due with the court or judicial
authorities whenever the creditor cannot accept or refuses to
accept payment. It generally requires a prior tender of
payment.
LESSOR-LESSE SITUATION
The rationale for such law is to prohibit the lessor from
ejecting the lessee when he unjustifiably refuses to accept payment
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:
(1) When the creditor is absent or unknown, or does not appear
at the place of payment;

angels notes
OBLIGATIONS & CONTRACTS
Paras and Atty. Valencias Class Discussion

(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 persons claim the same right to collect;
(5) When the title of the obligation has been lost.

Contemplates about CONSIGNATION when creditor unjustly

refuses to accept debtors payment
Consignation can also be applied in the following cases or
situations (instances where prior tender of payment is not
needed):
o
Creditor is absent or unknown or does not appear
at the place of payment
o
Creditor is incapacitated to receive the payment the
time it is due
o
Without just cause, creditor refuses to give a
receipt (questionable: how would you know that
creditor will not issue a receipt if there was no
tender of payment)
o
Two or more persons claim the same right to collect
o
The title of the obligation has been lost (ex. Issued a
promissory note but upon payment they creditor
cannot return your promissory note)
Instances wherein Rejection of Creditor is justified:
1. Payment by a 3rd person not interested *art. 1236
2. Payment of a different prestation *art 1244
3. Payment is partial *art 1248
4. Payment is not in legal tender *art 1249
5. Payment is premature

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.

Note: tender of payment without consignation does not extinguish the

debt; consignation must follow. Tender of the principal must also be
accompanied with the tender of interest which has accrued.
Q: When is consignation not required?
A: when there really exists no debt or obligation, and where therefore
payment is PURELY VOLUNTARY (a right, not a duty exists; ex: legal
redemption)
-

Valid prior tender, unless tender is excused

tender should be in full satisfaction of the claim,
not a partial payment CREDITOR REFUSES
WITHOUT JUST CAUSE
Prior notice of consignation (before deposit) purpose: to enable the creditor and other parties
interested to reconsider the previous refusal, and
thus, avoid litigation by the simple expedient of
accepting payment
Actual consignation (deposit) effects of deposit:
(1) property is in custodia legis (2) it will be
exempted from attachment and execution (3) if
perishable, the court may order the sale of the
property (4) if property cannot be placed in the
hands of the court you should ask the court for a
RECEIVERSHIP
Subsequent notice of consignation without such
notice, the consignation is VOID unless the amount
due is a consequence of a FINAL JUDGMENT

Tender of payment must be made in LEGAL TENDER (lawful

currency)

Contemplates on how consignation is actually made (judicial

in nature):
o
The thing must be deposited with the proper
judicial authorities
o
There must be PROOF that:

Tender had previously been made and it

was unjustifiably refused by the creditor
(general rule)

Debtor had previously notified the

creditor that consignation will be made
(tender is not required)

Article 1259
Note: if after tender, consignation is made very much later, interest
should run until the principal is paid.

The expenses of consignation, when properly made, shall be

charged against the creditor.

Article 1257

In order that the consignation of the thing due may release the
obligor, it must first 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.

Stresses out that there should be notice before consignation

(must be of a reasonable time)
Essential Requisites for Consignation
o
Existence of a valid debt (the following are not
debts: option, legal and conventional redemption, if
alleged debt has prescribed, debt is founded on an
illegal cause or consideration or is null and void, if
obligation of the debtor is conditional and condition
has not been fulfilled)
8

The expenses of consignation, when properly made, shall be

charged against the creditor
Expenses include those for the preservation or warehousing
of the goods pending the litigation

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.

Effects of Proper Consignation

o
debtor may ask the judge to order the cancellation
of the obligation
angels notes
OBLIGATIONS & CONTRACTS
Paras and Atty. Valencias Class Discussion

o
o

the running of interest is suspended

before the creditor ACCEPTS or before judge
declares the consignation to be proper, the
obligation REMAINS
Effects of Improper Consignation
o
The obligation remains because the consignation is
NOT EFFECTIVE
o
If at the time of the consignation the debt was
already due, the debtor is in DEFAULT

and he shall be responsible for damages. The same rule applies when the
nature of the obligation requires the assumption of risk.

GR: Obligation to deliver a specific thing is lost when it is

destroyed due to a fortuitous event before debtor has
incurred delay
Exception: (1)stipulation of contract or by (2) law or
(3)obligation requires the assumption or risk

Article 1263
Q: When may the debtor withdraw the thing or sum consigned
A:
As a matter of right
1. Before the creditor has accepted the consignation
2. Before there is judicial declaration that the consignation has
been properly made
As a matter of privilege
1. When after consignation the creditor authorizes the debtor to
withdraw the thing
-

In this article, the withdrawal is voluntarily made by the

debtor without the consent of the creditor

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.

In this article, creditor allows the debtor to withdraw

thing
Effects when withdrawal by debtor after consignation
been made
o
The obligation remains
o
Creditor loses any preference (priority) over
thing
o
Solidary co-debtors, guarantors, and sureties
RELEASED (unless they consented)

the
has

the
are

LOSS OF THE THING DUE

Loss includes the impossibility of performance
Q: When is there a loss?
A: a. when the object perishes physically (destroyed)
b. when it goes out of commerce
c. when it disappears in such a way that
i.
its existence is unknown
ii.
or it cannot be recovered
-

Impossibility of Performance includes

o
Physical impossibility
o
Legal impossibility (direct: prohibited by law;
indirect)
o
Moral impossibility

Article 1262
An obligation which consists in the delivery of a determinate
thing shall be extinguished if it should be lost or destroyed without the fault
of the debtor, and before he has incurred in delay.

GR: Loss of generic thing does not extinguish the obligation

Exception: (1) generic thing is delimited; ex: 50 kilos of sugar
from my 1999 harvest (2) generic thing has already been
segregated or set aside, in which case it has become a specific

Article 1264
The courts shall determine whether, under the circumstances,
the partial loss of the object of the obligation is so important as to
extinguish the obligation.

Article 1261

In an obligation to deliver a generic thing, the loss or destruction

of anything of the same kind does not extinguish the obligation.

The courts shall determine whether, under the circumstances,

the partial loss of the object of the obligation is so important
as to extinguish the obligation

Article 1265
Whenever the thing is lost in the possession of the debtor, it shall
be presumed that the loss was due to his fault, unless there is proof to the
contrary, and without prejudice to the provisions of article 1165. This
presumption does not apply in case of earthquake, flood, storm, or other
natural calamity.

Contemplates on a presumption that loss was due to debtors

fault (why? Because the thing is within your control)
DISPUTABLE PRESUMPTION loss was due to the fault of the
debtor. Thus, debtor can still present proof to the contrary
The presumption does not apply in the case of a NATURAL
CALAMITY (earthquake, flood, storm)

Article 1266
The debtor in obligations to do shall also be released when the
prestation becomes legally or physically impossible without the fault of the
obligor.

Contemplates on LOSS IN PERSONAL OBLIGATION:

o
Legal impossibility
o
Physical impossibility

Note: impossibility must be AFTER the constitution of the obligation

Q: If the act is subjectively impossible (debtors side) but otherwise
objectively possible (for all others), is the obligation extinguished?
A: It depends. Usually the obligation subsists unless personal
consideration is involved (ex. A particular company is provided by law to
furnish work on a certain day)
Q: What is the effect of loss thru a fortuitous event in reciprocal
obligations?

When by law or stipulation, the obligor is liable even for

fortuitous events, the loss of the thing does not extinguish the obligation,
9

angels notes
OBLIGATIONS & CONTRACTS
Paras and Atty. Valencias Class Discussion

A: GR the obligation that was not extinguished by the fortuitous event

remains (if after perfection the building is destroyed, the buyer must still
pay)
Exception are provided by law; ex (1) lease: both the lease and the
obligation to pay rent are extinguished; (2) contracts for a piece of work
Article 1267
When the service has become so difficult as to be manifestly
beyond the contemplation of the parties, the obligor may also be released
therefrom, in whole or in part.

Contemplates on the effect of difficulty beyond the parties

contemplation in providing the service
Refers to MORAL impossibility or IMPRACTICABILITY due to
change of certain conditions
Also referred to as DOCTRINE OF THE FRUSTRATION OF THE
COMMERCIAL OBJECT or FRUSTRATION OF ENTERPRISE

d.
e.
f.
g.
h.

Contributory negligence on part of the debtor (can be

mitigated)
Loss of the thing occurs after the debtor incur delay
Debtor promise to deliver the same thing to two or more
persons who have different interest
When obligation is to deliver a generic thing
When the obligation results from a crime except if creditor is
in mora accipiendi

CONDONATION OR REMISSION OF THE DEBT

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.

Note: real obligations (to give) are not included within this scope
-

Requisites for the article to apply:

o
Service must become so DIFFICULT that it was
manifestly beyond the contemplation of BOTH
parties; the difficulty could not POSSIBLY have been
anticipated or foreseen
o
One of the parties must ask for relief
o
The object must be a FUTURE SERVICE with FUTURE
UNUSUAL change in conditions

Article 1268
When the debt of a thing certain and determinate proceeds from
a criminal offense, the debtor shall not be exempted from the payment of
its price, whatever may be the cause for 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.

GR: In a CRIMINAL OFFENSES a fortuitous event DOES NOT

extinguish the obligation
Exception: when the creditor is in Mora Accipiendi

Article 1269
The obligation having been extinguished by the loss of the thing,
the creditor shall have all the rights of action which the debtor may have
against third persons by reason of the loss.

Simply stated: there is a transfer of rights against third

persons from the debtor to the creditor in case of loss

REQUISITES SO AS NOT TO BE LIABLE DUE TO FORTUITOUS EVENT:

a. The thing which is lost must be determinate
b. The thing is lost without any fault of the debtor. If
the thing is lost through the fault of the debtor, the
obligation is not extinguished; it is simply converted
into an obligation to indemnify the creditor for
damages
c. The thing is lost before the debtor has incurred in
delay. If not, he is liable for indemnity and damages
EXEPTIONS
a. When by law the debtor is liable
b. When by stipulation, you remain liable
c. Nature of the obligation assumes risk
10

Definition: it is the gratuitous abandonment by the creditor of

his right
Such requires the acceptance of the obligor which may be
made expressly or impliedly
Essential Requisites for Remission
o
There must be an agreement (must be accepted by
obligor)
o
Parties must be capacitated and must consent
o
There must be a subject matter (the thing to be
condoned)
o
The cause or consideration must be LEBERALITY
(because it is essentially gratuitous)
o
Obligation remitted must have been demandable
at the time of remission
o
Remission must not be inofficious (when you
donate more than you could give or receive by will)
so as not to prejudice his legitimes or compulsory
heirs (leg. children, leg. par, surviving spouse,
illegitimate children)
o
Formalities of a donation are required in the case of
an express remission
o
Waivers or remissions are not to be presumed
generally

Note: An express remission, not made in due form, cannot affect the
creditor if it is withdrawn in due time.
If remission is made in a will, it is essential that the will be
VALID extrinsically, and PROBATED.
If real property, it should be extrinsically valid and should be
validly published.
Q: What are the classes of Remission?
A:
a. Effect or extent
1. Total
2. Partial
b. Date of effectivity
1. Inter vivos (during life)
2. Mortis causa (after death)
c. Form
angels notes
OBLIGATIONS & CONTRACTS
Paras and Atty. Valencias Class Discussion

1.

Implied or tacit (requires no formality; conduct is

sufficient)
Express or formal

Q: What is the effect is remission is not accepted by the debtor?

A: the obligation remains. However, if the creditor does not really collect
within the statute of limitations (period of prescription), the debt may
be said to have been extinguished by PRESCRIPTION.

2.

If after the delivery to the creditor, the thing pledged is

returned to the debtor or of a third person who OWNS the
thing, it is presumed that the ACCESSORY OBLIGATION of
pledge has been remitted
Thus, the principal obligation (loan) remains in force
Presumption is only DISPUTABLE

Article 1271

Q: What is a contract of pledge?

A: It is an accessory obligation. It is the personal property given as
security or collateral which is delivered to the creditor

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.

Q: What is a chattel mortgage?

A: It is a property or collateral which remains in the hands of the debtor

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.

The delivery of a PRIVATE DOCUMENT (ex. Promissory note)

evidencing the credit gives rise to a DISPUTABLE presumption
of a remission or renunciation
This article is an example of an IMPLIED REMISSION (other ex:
voluntary destruction by the creditor of the instrument)

Note: As between the presumption of remission and the presumption of

payment, REMISSION ordinarily prevails

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.

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.

Delivery of a PRIVATE DOCUMENT gives rise to the

presumption that the creditor delivered it voluntarily, unless
the contrary is provided
The presumption is DISPUTABLE or PRIMA FACIE, for the law
itself says, until the contrary is proved

Note however: if the instrument of credit is still in the hands of the

creditor, this is evidence that the debt has not yet been paid, unless the
contrary be fully proved
Q: What are the Presumptions in Joint or Solidary Obligations?
A: if joint the presumption is that only the debtor who holds such
private document debt is remitted
If solidary the presumption is that the whole obligation has been
remitted
Artilce 1273
The renunciation of the principal debt shall extinguish the
accessory obligations; but the waiver of the latter shall leave the former in
force.

The renunciation of the principal debt shall extinguish the

accessory obligation; but the waiver of the latter shall leave
the former in force
Follows the rule of accessory follows the principal

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.
11

The obligation is extinguished from the time the characters of

creditor and debtor are merged in the same person
Definition: meeting in one person of the qualities of creditor
and debtor with respect to the same obligation
Requisites of a valid merger:
o
Take place between the PRINCIPAL DEBTOR and
CREDITOR. Therefore , confusion of creditor with
the guarantor does not extinguish the principal
obligation (only accessory obligation of guaranty is
extinguished)
o
Merger must be clear and definite (the merger of
the characters of CR and DR must be in the SAME
PERSON)
o
The very obligation involved must be the same or
identical

Note however: if an heir is a debtor of the deceased, merger does not

necessarily follow, for other creditors may be prejudiced
Note: Mere transfer to a third person of rights belonging to both the
debtor and the creditor BUT not the credit as against the debt does not
result in merger
Real rights, such as usufruct (right to the use and to the fruits)
over property, may be extinguished by merger when the naked owner
himself becomes the usufructuary.
If the reason for the confusion ceases, the obligation is
REVIVED.
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.

Contemplates on the effects of merger:

o
In the person of the principal debtor and creditor
principal and accessory obligation is extinguished;
guarantor is then released
o
In the person of the creditor and guarantor
guaranty is extinguished but debtors obligation
remains
angels notes
OBLIGATIONS & CONTRACTS
Paras and Atty. Valencias Class Discussion

Article 1277

Government and taxpayer are not mutually creditor of each

Confusion does not extinguish a joint obligation except as

regards the share corresponding to the creditor or debtor in whom the two
characters concur.

other!
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;
(5) That over neither of them there be any retention or
controversy, commenced by third persons and communicated in
due time to the debtor.

Confusion does not extinguish a joint obligation except as

regards the share corresponding to the creditor or debtor in
who the two characters concur

COMPENSATION
Article 1278
Compensation shall take place when two persons, in their own
right, are creditors and debtors of each other.

Compensation shall take place when two persons, in their

own right, are creditor and debtor of each other (balancing)
It is the extinguishment in the concurrent amount of the
obligations of those person who are reciprocally debtor and
creditor of each other
It is an abbreviated payment because the two debts are
extinguished without requiring the transfer of money or
property form one party to another

COMPENSATION vs. PAYMENT

COMPENSATION
Partial extinguishment is always
permitted
Takes place by operation of law
(legal compen)
COMPENSATION vs. MERGER
COMPENSATION
There must be two persons who
are mutually creditor and debtor
to each other
There must be two obligations
COMPENSATION vs. SET-OFF
COMPENSATION
Takes place by mere operation of
law

PAYMENT
Must be complete and indivisible
as a rule
Involves action or delivery

MERGER
Only one person in whom is
merged the qualities of creditor
and debtor
There can only be one obligation

SET-OFF
Must be pleaded to be effectual
Works as a sort of judicial
compensation (follows rules of
court

Kinds or classes of Compensation

o
Total obligation are completely extinguished
because they are of the same or equal amounts
o
Partial when a balance remains
o
Legal takes place by operation of law
o
Voluntary or conventional due to agreement of
parties
o
Judicial (set-off) must be pleaded; effective only
by an order from the court
o
Facultative one of the parties has the choice of
claiming the compensation or opposing it
Note: While facultative compensation is UNILATERAL and does not
require mutual agreement, VOLUNTARY or CONVENTIONAL
compensation requires MUTUAL CONSENT
12

Contemplates on the Requisites of Legal compensation:

o
AFFIRMATIVE REQUISITES

Each one of the obligors be bound principally and

be at the same time a principal creditor of the other
two debts and two credits (must generally be
bound as principals and not in their representative
capacity)

Both debts consist in a sum of money, or if

consumable (susceptible of substitution) is of the
same kind and quality

Two debts are due period has arrived or condition

has been fulfilled; neither of the debt has
prescribed or is invalid or illegal

They be liquidated and demandable exact amount

has already been determined
o
NEGATIVE REQUISITES

That over neither of them there be any retention or

controversy, commenced by third persons and
communicated in due time to the debtor

Meaning, there can be no legal compensation when

ones claim against another is still the subject of
COURT LITIGATION

There must have been no waiver of the

compensation

Compensation of the debts must not have been

prohibited by law (look at book for examples; civil
liability arising from a penal offense, claim for
future support

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 with respect to principal

debt
Exception to Article 1279
Ex: A owes B 500. C is the guarantor of A. B owes A 100. A
cannot pay. C will only have to pay for 400 because he can set
up the 100 credit of A as the basis for partial compensation

Article 1281
Compensation may be total or partial. When the two debts are
of the same amount, there is a total compensation.

angels notes
OBLIGATIONS & CONTRACTS
Paras and Atty. Valencias Class Discussion

Compensation may be total or partial. When the two debts

are of the same amount, there is total compensation

Article 1282
The parties may agree upon the compensation of debts which
are not yet due.

Contemplates on Conventional or Voluntary Compensation

Requisites mentioned in Article 1279 do not apply
It is sufficient that the agreement or contract which declares
the compensation should itself be valid
Parties should have LEGAL CAPACITY and must FREELY GIVE
THEIR CONSENT

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.

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.

Contemplates on Judicial Compensation or set-off or

Counterclaim
PLEADING and PROOF of the counterclaim must be made,
without this, the court CANNOT of its own accord declare the
compensation (must be alleged in your answer)
All the requisites in Article 1279 must be present except that
at the time of pleading, the claim need NOT YET be
LIQUIDATED

Jurisdiction of the Court Regarding the Value of the Demand

GR: depends upon the TOTALITY of the demand in all the causes of
action, irrespective of whether the plural cases arose out of the same or
different transactions
EXCEPTIONS
1. Where the claim joined under the same complaint are
separately owed by, or due to, different parties, in which case
each separate claim furnishes the jurisdictional test
2. Where NOT ALL the causes of action joined are demands or
claims for money
Note: Consequential damages and attorneys fees, when properly
claimed and recoverable as an item of damage, are not excluded from
the jurisdictional amount
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.

Rescissible or voidable debts are valid until rescinded or

voided, hence, compensation is allowed
To avoid unfairness if rescission or annulment is later on
decreed by the court, it is as if NO compensation ever took
place. The decree thus acts RETROACTIVELY

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.

13

Contemplates on a situation where: AFTER the compensation

has taken place one of the extinguished debts is ASSIGNED to
a stranger, ordinarily this would be a useless act since there is
nothing more to assign. The defense of compensation could
then be set up
EXCEPTION: when the assignment after compensation has
taken place was made WITH THE CONSENT of the debtor.
Such consent operates as a WAIVER OF THE RIGHTS to
compensation
EXCEPTION TO EXCEPTION: when at the time he gave his
consent, he RESERVED his right to compensation

3 situations
1. Assignment be made with the consent of the debtor
compensation cannot be put up
2. Assignment be made with the knowledge but without the
consent of the debtor compensation can be put up; this
refers to debts maturing before the assignment; legal
compensation has already taken place before the assignment
took place
3. Assignment may be made without the knowledge of the
debtor the crucial time here is the time of knowledge of the
assignment, not the time of assignment itself.
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 applies to compensation by operation of law

Contemplates that there shall be an indemnity for expenses of
exchange or transportation to the place of payment

Expenses of transportation applies to transportation of the goods

Expenses of exchange monetary exchange
Note: whoever claims compensation must pay for the exchange rate of
currency.
Foreign Exchange - conversion of an amount of money or currency of
one country into an equivalent amount of money or currency of another
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.

Contemplates on situations when legal compensation

CANNOT take place:

angels notes
OBLIGATIONS & CONTRACTS
Paras and Atty. Valencias Class Discussion

o
o
o

When one debt arises from a DEPOSITUM (not bank

deposit, for this is really a loan)
Debt arises from the obligations of a DEPOSITARY
Debt arises from the obligations of a BAILEEE IN
COMMODATUM (the borrower of property who
pays nothing for the loan)

If a person should have against him several debts which are

susceptible of compensation, the rule on the application of
payments shall apply to the order of the compensation
Thus, the more onerous is to be compensated first if there
was no designation made by the debtor

Article 1290
Note: in the three instances, there is FACULTATIVE COMPENSATION,
such as only the DEPOSITOR and the LENDER can claim for
compensation, not the debtor and the borrower.
o

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.

Debt arises because of a claim for SUPPORT due to

GRATUITOUS title

Note: support in arrears may be compensated but NOT FUTURE

SUPPORT, for this is vital to the life of the recipient

Obligations of a Depositary
a. Obliged to keep the thing safely and to return it when
required
b. Unless there is a stipulation to the contrary, the depositary
cannot deposit the thing with a third person
c. If deposit to a 3rd person is allowed, the depositary is LIABLE
for the loss if he deposited the thing with a person who is
manifestly careless or unfit
d. Is responsible for the negligence of his employees
e. Depositary cannot make use of the thing deposited without
the express permission of the depositor. However, when the
preservation of the thing requires its use, it must be used but
only for that purpose
Article 1288
Neither shall there be compensation if one of the debts consists
in civil liability arising from a penal offense.

Neither shall there be compensation if one of the debts

consists in civil liability arising from a penal offense
Why? Because the satisfaction of such obligation is imperative
However, victim can claim compensation but limited to the
accused to prevent his escaping liability but NOT to the victim
of a crime who happens to be indebted to the accused
Q: You owe A 3,000. A stole your watch and got convicted for such
crime. Can the accused claim compensation?
A: No, compensation is not proper here.
DEBTS WHICH CANNOT BE COMPENSATED
1. Debts arising from the contracts of depositum
2. Debts arising from contracts of commodatum
3. Claims for support due by gratuitous title
4. Obligations arising from criminal offenses
5. Certain obligations in favor of the government, such as taxes,
fees, duties and other of a similar nature (exception: if
amount is already liquidated, you can already defend
compensation)
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.

14

States that automatic compensation occurs if all requisites are

present
Such is applicable unless there has been valid waiver thereof
Compensation which extinguishes principal obligations also
extinguishes accessory obligations

Note: if one debt is larger than the other, the balance subsists as debt.
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 the substitution or change of an obligation by another, which

EXTINGUISHES or MODIFIES the first, either:
a. Changing its object or principal condition
b. Substituting another in place of the debtor
c. Subrogating a third person in the right of the creditor
Note: Change in period is part of the principal condition, which would
result to a PARTIAL NOVATION, since the period merely affects the
performance, not the creation of the obligation
-

Dual Purpose or Functions of Novation:

o
At the time it extinguishes the obligation, it creates
a new one in lieu of the old

Note: Novation does not operate as an absolute but only as a RELATIVE

EXTINCTION of debt.
Kinds of Novation:
According to its object or purpose
o
Real or objective changing the object of the
principal condition of the obligation
o
Personal or Subjective change of debtor or of
creditor)

Substituting the person of the debtor

(Expormission or Delegacion)

Subrogating a third person in the rights

of the creditor (change of creditor may
be by agreement or by operation of law)
o
Mixed change of object and parties
According to the Form of its Constitution
o
Express
o
Implied when the two obligation are essentially
incompatible with each other
According to its Extent or effect
angels notes
OBLIGATIONS & CONTRACTS
Paras and Atty. Valencias Class Discussion

Total or extinctive novation when the old

obligation is completely extinguished and a new
one is created
Requisites of an extinctive novation:
A previous valid obligation
An agreement of all parties concerned to a
new contract
Extinguishment of old obligation
The birth of a valid new obligaiton

Note: extinctive novation is never presumed; there must be an EXPRESS

INTENTION to novate. If implied, it is necessary that the old obligation is
completely superseded by the new one
o

Partial or Modificatory also termed IMPERFECT or

IMPROPER novation; the obligation still remains in
force except insofar as it has been modified

Note: should there be any doubt as to whether the novation is total or

partial, it shall be presumed to be merely modificatory.
-

Requisites for Novation (in General)

o
The existence of a VALID OLD obligation
o
The intent to extinguish or modify the old
obligation
by
a
substantial
difference;
extinguishment of the old obligation
o
The capacity and consent of all the parties (except
in the case of expromision, where the old debtor
does not participate); agreement of the parties to
the new obligation
o
The validity of the new obligation
Note: if the new obligation is subject to a SUSPENSIVE condition, and the
condition does not materialize, such new obligation never became valid
or effective, so no novation has resulted
-

Novation is NOT one of the means recognized by the RPC

whereby criminal liability can be extinguished

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.

Contemplates on express (declared in unequivocal terms) and

implied (complete or substantial incompatibility of the old and
new obligation) novation

Q: How is implied novation may be made?

A: it is done by making SUBSTANTIAL changes:
a. In the OBJECT or SUBJECT matter of the contract (ex.
Deliver a car instead or ring)
b. In the CAUSE or CONSIDERATION of the contract (ex.
Upward change in price; note: reduction in price implies
a remission)
c. In the PRINCIPAL TERMS or CONDITION of the contract
(ex. Conditional obligation changed to an absolute one)
Note: change of the object, cause, or principal
terms and conditions is not presumed; clear proof
of novation must be given
Note: if there is an increase of the term or period, there is certainly NO
NOVATION because in such cases there is no clear case of
15

incompatibility between the 2 obligations; neither is there a change in

the obligation. But if there is a reduction or decrease of the duration of
the term or period there is novation because there is a clear case of
incompatibility.
Q: What are instances when the court held that there was NO extinctive
Novation?
A: here, the original contract or obligation remains, subject only to the
slight modification introduced?
a. Only slight alteration on construction plans of buildings
b. When the new contract merely contains supplementary
agreement
c. When additional interest is agreed upon
d. When additional security is given
e. When after a final judgment, a contract was entered into
precisely to provide a method of payment other than that
stated in the judgment
f.
When guarantor agrees with creditor that he will also be a
principal debtor
g. Creditor merely extends the term of payment
h. When the place of payment is changed or when there is
variation in the amount of partial payment
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.

Contemplates on personal or subject novation (2 kinds):

o
Passive change of the debtor
o
Active change of the creditor
This article speaks of PASSIVE SUBJECTIVE novation which may
be in the form of:
o
Expromission where the initiative comes from a
third person
o
Delegacion initiative comes from the debtor; the
three parties, old and new debtor and creditor,
must agree

EXPROMISION
Initiative comes from a third person
It is essential that the old debtor be RELEASED from his
obligation, otherwise there will be no expromision
Requisites:
o
Initiative must come form at third person who will
be the new debtor
o
New debtor and the creditor must CONSENT
o
The old debtor must be excused or released from
his obligation
Note: old debtors consent or knowledge is not required
DELEGACION
Method of novation caused by the replacement of the old
debtor by a new debtor, who the old debtor has PROPOSED
him to the creditor, and which replacement has been agreed
to by said creditor and said by new debtor
Initiative must come from the old debtor himself
The old debtor must be released from the obligation
Parties in Delegacion:
o
Delgante original debtor
angels notes
OBLIGATIONS & CONTRACTS
Paras and Atty. Valencias Class Discussion

o
Delegatario creditor
o
Delegado new debtor
Requisites:
o
Initiative comes from the old debtor
o
All the parties concerned must consent or agree
(note: creditors mere acceptance of payment by a
third party is not an implied consent)
o
Acceptance by the creditor of the substitution

Q: What are the rights of the new debtor?

A: Article 1236 (beneficial reimbursement if payment was made without
the knowledge or against the will of the debtor) or Article 1237
(reimbursement and subrogation, if it was made with the old debtors
consent)
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.

If the substitution, is without the knowledge or against the will

of the debtor, the new debtors insolvency or non-fulfillment of
the obligation shall not give rise to any liability on the part of
the original debtor
Contemplates on a new debtor through EXPROMISION
Refers to EMPROMISION

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.

This article does not apply in cases of novation by

SUBROGATION of the creditor
This article applies in particular to EXTINCTIVE NOVATION
GR: extinguishment of the principal obligations carries with it
the extinguishment of the accessory obligations
Exception: accessory obligations or stipulations made in favor
of third persons (stipulations POUR AUTRUI) remains unless
said third persons have their consent to the novation

Q: If the novation is merely MODIFICATORY, are guarantors and sureties

released, if the novation is made WITHOUT their consent?
A:
If the modified obligation is now MORE ONEROUS, they are
liable only for the original obligation.
If the modified obligation is now LESS ONEROUS, the
guarantors and sureties are still responsible
Note: accessory obligations would still remain as accessory to the new
obligation provided that the debtors of said accessory obligations give
their consent.
Article 1297

Q: Why is the old debtor not responsible for the new debtors insolvency
or non-fulfillment?
A: Because the expromision was brought WITHOUT his intiative
Q: Does this article applies to a situation where there was knowledge or
consent of the old debtor?
A: It is still applicable because the initiative did not come from him

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.

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.

Effects of Insolvency by new debtor in DELEGACION (note: this

does not deal with other causes of non-fulfillment):
o
GR: it can no longer be revived
o
Exc1: If the insolvency was already existing and of
Public knowledge at the time of delegation, the old
debtor is LIABLE
o
Exc2: If the insolvency was already existing and
KNOWN to the debtor at the time of delegation, the
old debtor is LIABLE

Note: The article does NOT apply if there really was NO EXTINCTIVE
NOVATION, such as:

Third person was only an agent, messenger or employee of

the debtor

Third person acted only as guarantor or surety

When new debtor merely agreed to make himself solidarily

liable for the obligation or agree to make himself jointly or
partly responsible for the obligation

Contemplates on the effect if the new obligation is VOID:

o
There is no novation, and the old obligation
generally will subsist
o
If the new obligation is subject to a condition and
said condition does not materialize, the old
obligation subsists
Rules if new obligation is merely VOIDABLE:
o
The old obligation is novated because voidable
obligation is valid until it is annulled
o
If the new obligation is annulled, the old obligation
subsists
Exception: the parties intended that the former relation
should be extinguished in any event

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.

GR: the novation is void if the original obligation was void

Exception: when annulment claimed only by the debtor is
made or when ratification validates acts which are void
Rule if old obligation was extinguished by loss:
o
If loss was purely because of fortuitous event, the
novation is VOID for there would be NO obligation
to novate
o
If the loss made the debtor liable, there is still an
existing monetary obligation that may be the
subject of novation

Q: May a prescribed obligation be the subject of novation?

16

angels notes
OBLIGATIONS & CONTRACTS
Paras and Atty. Valencias Class Discussion

A: Yes, because unless the defense of prescription is set up by the

debtor, the obligation continues, since this failure amounts to a WAIVER
Note: In Novation by Expromision, when the new debtor sues the old
debtor for beneficial reimbursement, the old debtor can set up
whatever defenses he could have set against the creditor.
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.

Effect if the original obligation was conditional:

o
GR: the conditions attached to the old obligation
are also attached to the new obligation
o
Exception: if there is a CONTRARY STIPULATION

This does not require the debtors

consent (mere notification to him
is sufficient)
The defect in the credit or right is
not cured simply by assigning the
same (here, debtor generally still
has the right to present against
the new creditor and defense
available as against old creditor)

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.

Subrogation is the transfer to a third person of all the rights

appertaining to the creditor, including the right to proceed against
guarantors, or possessors of mortgages, subject to any legal provision or
any modification that may be agreed upon

1.

Kinds of Subrogation
1. From the viewpoint of cause or origin:
a. Conventional or voluntary requires an agreement
of the original parties and of the creditor; this must
be CLEARLY ESTABLISHED, otherwise, it is as if no
subrogation has taken place
b. Legal takes place by operation of law; this is NOT
PRESUMED, except in the case expressly mentioned
in the law
2. Viewpoint of extent
a. Total subrogation
b. Partial subrogation (there would now be two or
more creditors)

2.
3.

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.

Conventional subrogation of a third person requires the consent

of the original parties and of the third person.

Contemplates on conventional or voluntary subrogation

The CONSENT OF ALL the parties is required (debtor, old
creditor, new creditor)

Note: Generally, the debtor loses the right to present against the new
creditor any defense which he could have set up against the old creditor
As between conventional subrogation and assignment of the
credit, the latter, insofar as the creditor is concerned should be
preferred.
ASSIGNMETN OF CREDIT vs. CONVENTIONAL SUBROGATION
ASSIGNMETN OF CREDIT
CONVENTIONAL SUBROGATION
There is mere transfer of the Extinguishes the obligation and
SAME right or credit (transfer did creates a new one
not extinguish the credit)
17

This article speaks of LEGAL SUBROGATION which is presumed

present in the following situations:
A creditor pays another creditor who is preferred, even
without the debtors knowledge Debtor may set up against
the new creditor defense which he could have set up against
the old creditor because subrogation took place by operation
of law.
When a third person, not interested in the obligation pays
with the EXPRESS or TACIT approval of the debtor
When even without the knowledge of a debtor, a person
interested (ex. Guarantor) in the fulfillment of the obligation
pays, without prejudice to the effects of confusion as to the
latters share

Article 1303

Article 1301

The defect of the old obligation

may be cured in such a way that
the new obligation becomes
entirely valid (thus, there is no
right to present against the new
creditor defenses which debtor set
up against old creditor

Article 1302

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.

This requires the debtors consent

Effects of Subrogation:
o
The credit and all the appurtenant rights, either
against the debtor, or against third persons, are
transferred

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.

Contemplates on Partial Subrogation which results to 2

creditors, namely:
o
The old creditor who still remains a creditor as to
balance
o
New creditor who is creditor to the extent of what
he had paid the creditor
Note: the original creditor should be preferred

angels notes
OBLIGATIONS & CONTRACTS
Paras and Atty. Valencias Class Discussion