EXTINGUISHMENT OF OBLIGATIONS

Modes of extinguishment of an obligation

Principal Modes (PaLoCo3N)
1. Payment or performance
2. Loss of the thing due
3. Condonation or remission of debt
4. Confusion or merger
5. Compensation
6. Novation (NCC, Art. 1231).

Other Modes (PARF)

7. Annulment
8. Rescission
9. Fulfillment of a resolutory condition
10. Prescription (NCC, Art. 1231).

NOTE: The enumeration is not exclusive.

Other Causes not expressly mentioned (Rabuya, 2017)
11. Death – in obligations which are of purely personal character
12. Arrival of resolutory period
13. Mutual dissent
14. Change of civil status
15. Happening of unforseen events

1. PAYMENT OR PERFORMANCE
Payment is the fulfillment of the obligation by the realization of the purposes for which it was constituted
(Jurado, 2010). (1998, 2009 BAR)
Payment may consist not only in the delivery of money but also the giving of a thing (other than money), the
doing of an act, or not doing of an act (NCC, Art. 1232).
Characteristics of payment
1. Integrity – the payment of the obligation must be completely made.
2. Identity – the payment of the obligation must consist the performance of the very thing due.
3. Indivisibility – the payment of the obligation must be in its entirety.

Integrity
GR: Payment or Performance must be complete (NCC, Art. 1233).
XPNs:
1. Substantial performance performed in good faith (NCC, Art. 1234);
2. When the obligee accepts the performance, knowing its incompleteness or irregularity and without
expressing any protest or objection; (NCC, Art. 1235);
3. Debt is partly liquidated and partly unliquidated, but the liquidated part of the debt must be paid in full.

Substantial performance doctrine

It provides the rule that if a good-faith attempt to perform does not precisely meet the terms of an agreement or
statutory requirements, the performance will still be considered complete if the essential purpose is
accomplished (Black’s Law Dictionary, 2009).
Requisites for substantial performance doctrine
1. Attempt in good-faith to comply with obligation;
2. Slight deviation from the obligation; and the omission or defect of the performance is technical and
unimportant; and does not pervade the whole, or is not material that the object which the parties intended to
accomplish is not attained (Tolentino, 2002).

Identity of the thing

GR: Thing paid must be the very thing due and cannot be another thing even if of the same or more quality and
value.
XPNs:
1. Dation in payment;
2. Novation of the obligation;
3. Obligation is facultative.

NOTE: In an obligation to do or not to do, an act or forbearance cannot be substituted by another act or
forbearance against the obligee’s will.
Indivisibility
GR: Debtor cannot be compelled by the creditor to perform obligation in parts and neither can the debtor
compel the creditor to accept obligation in parts.
XPNs: When:
1. Partial performance has been agreed upon;
2. Part of the obligation is liquidated and part is unliquidated;
3. To require the debtor to perform in full is impractical.

Acceptance by a creditor of a partial payment NOT an abandonment of its demand for full payment
When creditors receive partial payment, they are not ipso facto deemed to have abandoned their prior demand
for full payment.
To imply that creditors accept partial payment as complete performance of their obligation, their acceptance
must be made under circumstances that indicate their intention to consider the performance complete and to
renounce their claim arising from the defect.
NOTE: While Article 1248 of the Civil Code states that creditors cannot be compelled to accept partial payments,
it does not prohibit them from accepting such payments (Selegna Management and Development Corp. v. UCPB,
G.R. No. 165662, May 30, 2006).
Requisites of a valid payment
The person who pays the debt must be the debtor;
1. The person to whom payment is made must be the creditor;
2. The thing to be paid or to be delivered must be the precise thing or the thing required to be delivered by the
creditor;
3. The manner (if expreslly agreed upon), time, and place of payment, etc.;
4. Acceptance by the creditor.

Kinds of Payment
1. Normal - when the debtor voluntarily performs the prestation stipulated;
2. Abnormal - when he is forced by means of a judicial proceeding, either to comply with the prestation or to pay the
indemnity (Tolentino, 1991).
Person who pays
The following persons may effect payment and compel the creditor to accept the payment:
1. Debtor himself;
2. His heirs and assigns;
3. His agents and representatives; or
4. Third persons who have a material interest in the fulfilment of the obligation ([NCC, Art. 1236 (1)].

PAYMENT MADE BY THIRD PERSONS

GR: The creditor is not bound to accept payment or performance by a third person.
XPNs:
1. When made by a third person who has interest in the fulfillment of the obligation;
2. Contrary stipulation (NCC, Art. 1236).

NOTE: The rules on payment by a third person (NCC, Art. 1236 to 1238) cannot be applied to the case of a third
person who pays the redemption price in sales with right of repurchase. This is so because the vendor a retro is
not a debtor within the meaning of the law (Jurado, 2010).
Rights of a third person who made the payment
1. If the payment was made with knowledge and consent of the debtor:
a. Can recover entire amount paid (absolute reimbursement);
b. Can be subrogated to all rights of the creditor.
2. If the payment was made without knowledge or against the will of the debtor – can recover only insofar as
payment has been beneficial to the debtor (right of conditional reimbursement).
NOTE: 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 (NCC, Art. 1238).
Person to whom payment is made
Persons entitled to receive the payment:
1. The person in whose favor the obligation has been constituted;
2. His successor in interest; or
3. Any person authorized to receive it (NCC, Art. 1240).

Payment to an unauthorized person

GR: Payment to an unauthorized person is not a valid payment (NCC, Art. 1241).
XPNs:
1. Payment to an incapacitated person if:
a. He kept the thing delivered; or
b. It has been beneficial to him (NCC, Art. 1241);
2. Payment to a third person insofar as it redounded to the benefit of the creditor;

Benefit to the creditor need not be proved: (RRE)

a. If after the payment, the third person acquires the creditor’s Rights;
b. If the creditor Ratifies the payment to the third person;
c. If by the creditor’s conduct, the debtor has been led to believe that the third person had authority to receive
the payment (Estoppel) (NCC, Art. 1241).

3. Payment in good faith to the possessor of credit (NCC, Art. 1242).

NOTE : Payment made to the creditor by the debtor after the latter has been judicially ordered to retain the debt
shall not be valid. (NCC, Art. 1243).

SPECIAL FORMS OF PAYMENT

Dation in Payment
Alienation by the debtor of a particular property in favor of his creditor, with the latter’s consent, for
the satisfaction of the former’s money obligation to the latter, with the effect of extinguishing the said
money obligation.
Application of Payment
Designation of the particular debt being paid by the debtor who has two or more debts or obligations of
the same kind in favor of the same creditor to whom the payment is made .
Payment by Cession
Debtor cedes his property to his creditors so the latter may sell the same and the proceeds realized
applied to the debts of the debtor.
Tender of Payment
Voluntary act of the debtor whereby he offers to the creditor for acceptance the immediate
performance of the former’s obligation to the latter.
Consignation
Act of depositing the object of the obligation with the court or competent authority after the creditor
has unjustifiably refused to accept the same or is not in a position to accept it due to certain reasons or
circumstances.

Dation in payment (dacion en pago)

The delivery and transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent
of the performance of the obligation. The property given may consist not only of a thing but also of a real
right (Tolentino, 2002)

FORM OF PAYMENT
1. Payment in cash – all monetary obligations shall be settled in Philippine currency. However, the parties may
agree that the obligation be settled in another currency at the time of payment (Sec. 1, RA 8183).

2. Payment in check or other negotiable instrument – not considered payment, they are not considered legal
tender and may be refused by the creditor except when:
a. the document has been encashed; or
b. it has been impaired through the fault of the creditor (NCC, Art. 1249).

PAYMENT IN CASH (2008 BAR)

Legal Tender
Legal tender means such currency which in a given jurisdiction can be used for the payment of debts, public and
private, and which cannot be refused by the creditor (Tolentino, 2002).
The legal tender covers all notes and coins issued by the Bangko Sentral ng Pilipinas and guaranteed by the
Republic of the Philippines. The amount of coins that may be accepted as legal tender are:
1. 1-Peso, 5-Pesos, 10-Pesos coins in amount not exceeding P1,000.00
2. 25 centavos or less – in amount not exceeding P100. 00 (BSP Circular No. 537, Series of 2006, July 18, 2005).

PAYMENT BY NEGOTIABLE INSTRUMENT (2008 BAR)

Rule on tender payment as to checks
---
Q: When does payment by a negotiable instrument produce the effect of payment?
A: (1) Only when it is cashed, or (2) When through the fault of the creditor, they have been impaired [NCC, Art.
1249 (2)].
A check does not constitute a legal tender, thus a creditor may validly refuse it. However, this does not
prevent a creditor from accepting a check as payment – the creditor has the option and the discretion of
refusing or accepting it (Far East Bank & Trust Company v. Diaz Realty, Inc, G.R. No. 138588, August 23,
2001).

Extraordinary Inflation
Exists when there is a decrease or increase in the purchasing power of the Philippine currency which is unusual
or beyond the common fluctuiation iin the value of said currency and such decrease or increase could not have
been reasonably foreseen or was manifestly beyond the contemplation of the parties at the time of the
establishment of the obligation (Tolentino, 2002).
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 (NCC, Art. 1250).
When the currency is devaluated in terms beyond what could have been reasonably forseen by the parties, the
doctrine of unforseen risks can be applied, and the effects of the devaluation should not be borne by the creditor
alone. The revaluation of the credit in such cases must be made according to the principles of good faith and in
view of the circumstances of each particular case, recognizing the real value of the credit as in consonance with
the intent of the parties.
NOTE: Requisites for application of Art. 1250, NCC (Rabuya, 2017).
1. That there was an official declaration of extra-ordinary inflation or deflation from the BSP;
2. That the obligation was contractual in nature; and
3. That the parties expressly agreed to consider the effects of the extraordinary inflation or deflation.

PLACE OF PAYMENT
GR: Payment must be made in the place designated in the obligation (NCC, Art. 1251).
XPN: If there is no express designation or stipulation in the obligation:
1. At the place where the thing might be at the time the obligation was constituted – if the obligation is to deliver
a determinate thing;
2. At the domicile of the debtor – in any other case (NCC, Art. 1251).

APPLICATION OF PAYMENTS
It is the designation of the debt to which the payment must be applied when the debtor has several obligations
of the same kind in favor of the same creditor (NCC, Art. 1252).
Requisites:
1. There is only one debtor and creditor;
2. The debtor owes the creditor two or more debts;
3. Debts are of the same kind or identical nature;

e.g. both debts are money obligations obtained on different dates.

4. All debts are due and demandable, except:
a. When there is mutual agreement between the parties (Tolentino, 2002);
b. The application is made by the party for whose benefit the term has been constituted [NCC, Art. 1252(1]).
5. The payment made is not sufficient to cover all obligations.

Right of the debtor in the application of payments

GR: The law grants to the debtor a preferential right to choose the debt to which his payment is to be applied.
But the right of the debtor is not absolute; he cannot impair the rights granted by law to the creditor (Tolentino,
2002).
XPN: Debtor’s failure to ascertain which debt his payment is to be applied. – The right of the debtor to choose to
which debt his payment will be applied against may be transferred to the creditor when he fails to make the
application and subsequently he accepts a receipt from the creditor evidencing the latter’s choice of application.
Under this circumstance, the debtor cannot complain of the application made by the creditor unless there be a cause
for invalidating such act.

Rules on legal application of payment

The payment should be applied to the more onerous debts:
1. When a person is bound as principal in one obligation and as surety in another, the former is more onerous.
2. When there are various debts, the oldest ones are more burdensome.
3. Where one bears interest and the other does not, even if the latter is the older obligation, the former is
considered more onerous.
4. Where there is an encumbrance, the debt with a guaranty is more onerous than that without security.
5. With respect to indemnity for damages, the debt which is subject to the general rules on damages is less
burdensome than that in which there is a penal clause.
6. The liquidated debt is more burdensome than the unliquidated one.
7. An obligation in which the debtor is in default is more onerous than one in which he is not (Tolentino, 2002).

Effect of creditor’s refusal

If the debtor makes a proper application of payment, but the creditor refuses to accept it because he wants to
apply it to another debt, such creditor will incur in delay (Tolentino, 1991).

PAYMENT BY CESSION
Cession
The assignment or cession contemplated here is the abandonment of the universality of the property of the
debtor for the benefit of his creditors. In order that such property may be applied to the payment of the credits.
The initiative comes from the debtor, but it must be accepted by the creditors in order to become effective. A
voluntary assignment cannot be imposed upon a creditor who is not willing to accept it.
If the offer is not accepted by the creditors, the same end may be attained by a proceeding in insolvency
instituted in accordance with Insolvency Law.
Circumstances evidencing payment by cession
Debtor abandons all of his property for the benefit of his creditors in order that from the proceeds thereof, the
latter may obtain payment of credits.

Requisites:
1. Plurality of debts;
2. Partial or relative insolvency of the debtor; and
3. Acceptance of the cession by the creditors

DATION IN PAYMENT PAYMENT IN CESSION

Number of creditors
Maybe one creditor.
Financial condition of the debtor
Not necessarily in state of financial
difficulty.
Object
Thing delivered is considered as
equivalent of performance.
Extent of the extinguishment
Payment extinguishes obligation to the
extent of the value of the thing delivered
Plurality of creditors.
Debtor must be partially or relatively
insolvent.
Universality or property of debtor is what is
ceded.
Merely releases debtor for net proceeds of
things ceded or assigned, unless there is
contrary intention.
as agreed upon, proved or implied from
the conduct of the creditor.
Ownership
Ownership is transferred to CR upon Ownership is not transferred.
delivery.
Novation
An act of novation. Not an act of novation.
Presumption of insolvency
Does not presuppose insolvency. Presupposes insolvency.

Tender of Payment
The definitive act of offering to the creditor what is due him together with the demand that the creditor accept
the same (FEBTC v. Diaz Realty Inc., G.R. No. 138588, August 23, 2001).
Tender of payment is the manifestation by debtors of their desire to comply with or to pay their obligation (Sps.
Benos v. Sps. Lawilao, G.R. No. 172259, December 5, 2006).
NOTE: If the creditor refuses the tender of payment without just cause, the debtors are discharged from the
obligation by the consignation of the sum due (Sps. Benos v. Sps. Lawilao, G.R. No. 172259, December 5, 2006).

Consignation
Act of depositing the object of the obligation with the court or competent authority after the creditor has
unjustifiably refused to accept the same or is not in a position to accept it due to certain reasons or
circumstances (Pineda, 2000).
NOTE: Once the consignation has been duly made, the debtor may ask the judge to order the cancellation of the
obligation (NCC, Art. 1260).
Requisites of consignation (VP-CPAS)
1. There was a debt due;
2. The consignation of due obligation was made because of some legal cause provided under NCC, Art. 1256;
3. The previous notice of the consignation had been given to the person interested in the performance of the
obligation;
4. The amount or thing due was placed at the disposal of the court; and
5. That after the consignation had been made the persons interested were notified thereof.

NOTE: Requirement No. 5 may be complied with by the service of summons upon the defendant creditor together
with a copy of teh complaint.

Effectivity of consignation as payment

GR: Consignation shall produce effects of payment only if there is a valid tender of payment.
XPNs: It shall, however, not produce the same effect in the following cases. When: (ARTIT)
1. Creditor is Absent or unknown, or doesn’t appear at place of payment;
2. Creditor Refuses to issue a receipt without just cause;
3. Title of the obligation has been lost;
4. Creditor is Incapacitated to receive payment at the time it is due;
5. Two or more persons claim the right to collect (NCC, Art. 1256).

Right of the debtor to withdraw the thing deposited

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
(NCC, Art.1260).

NOTE: 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 (NCC, Art. 1261).
TENDER OF PAYMENT CONSIGNATION
Nature
Antecedent of consignation or preliminary Principal or consummating act for the
act to consignation. extinguishment of the obligation.
Effect
It does not by itself extinguish the It extinguishes the obligation when declared
obligation. valid.
Character
Extrajudicial. Judicial for it requires the filing of a complaint
in court (Pineda, 2000).

2. LOSS OF THE THING DUE

Loss here is not contemplated in its strict and legal meaning and is not limited to obligations to give, but extends
to those which are personal, embracing therefore all causes which may render impossible the performance of
the prestation. In some Codes, this is designated as impossibility of performance.
NOTE: The impossibility of performance must be subsequent to the execution of the contract in order to
extinguish the obligation; if the impossibility already existed when the contract was made, the result is not
extinguishment but inefficacy of the obligation under NCC, Articles 1348 & 1493.
When a thing is considered lost (DOPE)
1. It Disappears in such a way that its existence is unknown;
2. It goes Out of commerce;
3. It Perishes; or
4. Its Existence is unknown or if known, it cannot be recovered.

Effect of loss of the thing/object of the obligation

If the obligation is a:
1. Determinate obligation to give:

Requisites
a. The thing lost must be determinate;
b. The thing lost is without fault of the debtor;
c. The thing is lost before the debtor has incurred delay (NCC, Art. 1262).

GR:The obligation is extinguished when the object of the obligation is lost or destroyed (NCC, Art. 1262).
XPNs: (LAS-CD-PCG)
a. Law provides otherwise (NCC, Art. 1262);
b. Nature of the obligation requires the Assumption of risk;
c. Stipulation to the contrary;
d. Debtor Contributed to the loss;
e. Loss the of the thing occurs after the debtor incurred in Delay;
f. When debtor Promised to deliver the same thing to two or more persons who do not have the same interest
(NCC, Art. 1165);
g. When the debt of a certain and determinate thing proceeds from a Criminal offense (NCC, Art. 1268);
h. When the obligation is Generic (NCC, Art. 1263).

2. Generic obligation to give:

GR: The obligation is not extinguished because a generic thing never perishes (genus nun guam perit (NCC, Art.
1263).
XPNs:
a. In case of generic obligations whose object is a particular class or group with specific or determinate
qualities (delimited generic obligation);
b. In case the generic thing has already been segregated or set aside, in which case, it has become
specific.
3. An obligation to do – the obligation is extinguished when the prestation becomes legally or physically
impossible without the fault of the obligor (NCC, Art. 1266).

Types of impossibility to perform an obligation to do

1. Legal impossibility – act stipulated to be performed is subsequently prohibited by law.
2. Physical impossibility – act stipulated could not be physically performed by the obligor due to reasons
subsequent to the execution of the contract (Pineda, 2000).

NOTE: The impossibility must be after the constitution of the obligation. If it was before, there is nothing to
extinguish.
Effect of partial loss
1. Due to the fault or negligence of the debtor – Creditor has the right to demand the rescission of the obligation
or to demand specific performance, plus damages, in either case.
2. Due to fortuitous event:
a. Substantial loss – obligation is extinguished.
b. Unsubstantial loss – the debtor shall deliver the thing promised in its impaired condition (NCC, Art.
1264).

Effect when the thing is lost in the possession of the debtor

GR: It is presumed that loss is due to debtor’s fault. The obligation is not extinguished.
XPN: Presumption shall not apply in case loss is due to earthquake, flood, storm or other natural calamity (NCC,
Art. 1262).
XPN to the XPN: Debtor still liable even if loss is due to fortuitous event when:
1. Debtor incurred in delay; or
2. Debtor promised to deliver the thing to two or more persons with different interests [NCC, Art.
1165(3)].

Effect of unforeseen difficulty of fulfilment

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 (NCC, Art. 1267). The impossibility of performance of
an obligation to do shall release the obligor.

Rebus sic stantibus

A principle in international law which means that an agreement is valid only if the same conditions prevailing at
the time of contracting continues to exist at the time of performance. It is the basis of the principle of unforeseen
difficulty of service (NCC, Art. 1267).
NOTE: Principle of unforeseen events applies 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 (NCC,
Art. 1267). However, this principle cannot be applied absolutely in contractual relations since parties are
presumed to have assumed the risk of unfavorable developments (Pineda, 2000). This rule also does not apply
to obligations for the payment of a sum of money when there is a change in the value of the stipulated currency.
In such case, Art. 1250 will apply (Tolentino, 2002).

Requisites in order to relieve the debtor from his obligation, in whole or in part, based on unforeseen
difficulty of fulfilment
1. Event or change in circumstance could not have been foreseen at the time of the execution of the contract;
2. Such event makes the performance extremely difficult but not impossible;
3. The event must not be due to the act of any of the parties;
4. The contract is for a future prestation (Tolentino, 2002).

Debt which proceeds from a criminal offense

GR: Debtor shall not be exempted from the payment of his obligation regardless of the cause of the loss. XPN:
The thing having been offered by debtor to the person who should receive it, the latter refused without
justification to accept it (NCC, Art. 1268).
NOTE: Offer referred in Art. 1268 is different from consignation; the former refers to extinguishment of
obligation through loss while the latter refers to the payment of the obligation.
Creditor’s right of action
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 (NCC, Art. 1269).
This refers not only the rights and actions which the debtor may have against third persons, but also to any indemnity
which the debtor may have already received.

3. CONDONATION OR REMISSION OF DEBT

An act of liberality by virtue of which the creditor, without receiving any price or equivalent, renounces the
enforcement of the obligation, as a result of which it is extinguished in its entirety or in that part or aspect of the
same to which the condonation or remission refers (Pineda, 2000).
Requisites of condonation (GAIDE)
1. Must be Gratuitous;
2. Acceptance by the debtor;
3. Must not be Inofficious;
4. Formalities provided by law on Donations must be complied with if condonation is express; and
5. An Existing demandable debt at the time the remission is made.

NOTE: Remission or condonation of a debt is in reality a donation (Jurado, 2010).

Form of express remission

It must comply with the forms of donation (NCC, Art. 1270).

Form of implied remission

The Code is silent with respect to the form of implied remission. There must be acceptance by the obligor or debtor
(Jurado, 2010).

Manner and kinds of remission:

1. Total – refers to the remission of the whole of the obligation;
2. Partial – remission of the part of the obligation: to the amount of indebtedness or to an accessory
obligation only (such as pledge or interest) or to some other aspect of the obligation (such as solidary);
3. Inter vivos - effective during the lifetime of the creditor;
4. Mortis causa - effective upon death of the creditor. In this case, the remission must be contained in a
will or testament (Tolentino, 1991);
5. Express – when it is made formally, it should be in accordance with the forms of ordinary donations
with regard to acceptance, amount and revocation;
6. Implied – when it can be inferred from the acts of the parties Effect of delivery of evidence of credit
to debtor
If the creditor voluntarily delivers the private document evidencing the credit to the debtor, there is a
presumption that he renounces his right of action against the latter for the collection of the said credit (Jurado,
2010).
NOTE: The presumption here is only prima facie and may be overcome by contrary evidence (Tolentino, 1991).
Requisites
1. The document evidencing the credit must have been delivered by the creditor to the debtor;
2. The document must be a private document;
3. The delivery must be voluntary (NCC, Art. 1271).

NOTE: If the document is public, the presumption does not arise considering the fact that the public character of
the document would always protect the interest of the creditor (Jurado, 2010).

Effect of remission in general

It extinguishes the obligation in its entirety or in the part or aspect thereof to which the remission refers
(Jurado, 2010).

Effect of the remission of the principal debt with respect to the accessory obligation and vice versa
The renunciation of the principal debt shall extinguish the accessory but the waiver of the latter shall leave the
former in force (NCC, Art. 1273).
NOTE: 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 (NCC,
Art. 1274).

Effect of inofficious condonation

It may be totally revoked or reduced depending on whether or not it is totally or only partly inofficious (Pineda,
2000).
The obligation remitted is considered inofficious if it impairs the legitime of the compulsory heirs (NCC, Art.
752).

Acceptance by the debtor

The acceptance by the debtor is required. There can be no unilateral condonation. This is because condonation
or remission is an act of liberality. It is a donation of an existing credit, considered a property right, in favor of
the debtor, it is required that the debtor gives his consent thereto by making an acceptance. If there is no
acceptance, there is no condonation (Pineda, 2009).

4. CONFUSION OR MERGER OF RIGHTS

There is a confusion when there is a meeting in one person of the qualities of a creditor and debtor of the same
obligation (4 Sanchez Roman 421).
Requisites of confusion or merger of rights
1. It must take place between the creditor and the principal debtor (NCC, Art. 1276);
2. The very same obligation must be involved (for if the debtor acquires rights from the creditor, but not the
particular obligation in question, there will be no merger);
3. The confusion must be total or as regards the entire obligation.

Effect of confusion or merger of rights

The creditor and debtor becomes the same person involving the same obligation. Hence, the obligation is
extinguished (NCC, Art. 1275).

There can be partial confusion

It will be definite and complete up to the extent of the concurrent amount or value, but the remaining obligation
subsists (Pineda, 2000).

Effect of confusion or merger in relation to the guarantors

1. Merger which takes place in the person of the principal debtor or principal creditor benefits the guarantors.
The contract of guaranty is extinguished.
2. Confusion which takes place in the person of any of the guarantors does not extinguish the obligation (NCC,
Art. 1276).

Effect of confusion or merger in one debtor or creditor in a joint obligation

GR: Joint obligation is not extinguished since confusion is not definite and complete with regard to the entire
obligation. A part of the obligation still remains outstanding.
XPN: Obligation is extinguished with respect only to the share corresponding to the debtor or creditor
concerned. In effect, there is only partial extinguishment of the entire obligation (NCC, Art. 1277; Pineda, 2000).

Effect of confusion or merger in one debtor or creditor in a solidary obligation

If a solidary debtor had paid the entire obligation, the obligation is totally extinguished without prejudice to the
rights of the solidary debtor who paid, to proceed against his solidary co-debtors for the latter’s individual
contribution or liability (NCC, Art. 1215).

Revocation of confusion or merger of rights

If the act which created the confusion is revoked for some causes such as rescission of contracts, or nullity of the
will or contract, the confusion or merger is also revoked. The subject obligation is revived in the same condition
as it was before the confusion.
NOTE: During such interregnum, the running of the period of prescription of the obligation is suspended.
(Pineda, 2000)

5. COMPENSATION
It is a mode of extinguishing obligations that take place when two persons, in their own right, are creditors and
debtors of each other (NCC, Art. 1278).
It is the offsetting of the respective obligation of two persons who stand as principal creditors and debtors of
each other, with the effect of extinguishing their obligations to their concurrent amount.

Requisites of compensation (1998, 2002, 2008, 2009 BAR)

In order that compensation may be proper, it is necessary that (NCC, Art. 1279):
1. Each one of the obligors must be bound principally, and that he be at the same time a principal creditor of the
other except guarantor who may set up compensation as regards what the creditor may owe the principal (NCC,
Arts. 1279-1280);
2. Both debts consist in 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. Both debts are due;
4. Both debts are liquidated and demandable;
5. Neither debt must be retained in a controversy commenced by third person and communicated in due time to
the debtor (neither debt is garnished) (NCC, Art. 1279); and
6. Compensation must not be prohibited by law. (NCC, Art. 1290).

NOTE: When all the requisites mentioned in Art. 1279 of the Civil Code 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 (NCC, Art. 1290).
Effects of Compensation:
1. Both debts are extinguished;
2. Interests stop accruing on the extinguished obligation or the part extinguished;
3. The period of prescription stops with respect to the obligation or part extinguished;
4. All accessory obligations of the principal obligation which has been extinguished are alsoextinguished (4
Salvat 353).

Compensation v. Payment
BASIS COMPENSATION
Definition A mode of extinguishing to the
concurrent amount, the
obligations of those persons
who in their own right are
reciprocally debtors and
creditors of each other.
As to the necessity of Capacity of parties not
the capacity of the necessary
parties Reason: Compensation operates
by law, not by the act of the
parties.
As the susceptibility of There can be partial
partial extinguishment of the
extinguishment obligation.
PAYMENT
Payment means not only delivery of
money but also performance of an
obligation.
Debtor must have capacity to
dispose of the thing paid; creditor
must have capacity to receive
payment.
The performance must be complete
and indivisible unless waived by the
creditor.
As to the operation of Legal compensation takes place
extinguishing the by operation of law without
obligation simultaneous delivery.
As to the relationship Parties must be mutually
of the parties debtors and creditors of each
other.
Takes effect by the act of the parties
and involves delivery or action.
It is not necessary that the parties be
mutually debtors and creditors of
each other.

Compensation v. Confusion

COMPENSATION CONFUSION
(NCC, Arts. 1278-1279) (NCC, Arts. 1275-1277)
Two persons who are mutual debtors One person where qualities of debtor and creditor are
and creditors of each other. merged.
At least two obligations. One obligation.

Compensation v. Counterclaim or Set-off

COMPENSATION COUNTERCLAIM /
SET-OFF
Need not to be pleaded; takes place by It must be pleaded to be effectual.
operation of law and extinguishes
reciprocally the two debts as soon as
they exist simultaneously, to the amount
of their respective sums.
Generally, both debts must be liquidated. Does not require that debts are liquidated.
Legal or conventional compensation Judicial compensation provided that the requirements
governed by the Civil Code. of Rules of Court, particularly on Counterclaims
and/or Cross-claims are observed.

KINDS OF COMPENSATION
1. Legal compensation – by operation of law;
2. Conventional – by agreement of the parties;
3. Judicial (set-off) – by judgment of the court when there is a counterclaim duly pleaded, and the compensation
decreed;
4. Facultative – may be claimed or opposed by one of the parties.

Conventional compensation
It is one that takes place by agreement of the parties.

Effectivity of conventional compensation

For compensation to become effective:
GR: The mutual debts must be both due (NCC, Art. 1279).
XPN:The parties may agree that their mutual debts be compensated even if the same are not yet due. (NCC, Art.
1282).

Judicial compensation
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 (NCC, Art. 1283).
All the requisites mentioned in Art. 1279 must be present, except that at the time of filing the pleading, the claim
need not be liquidated. The liquidation must be made in the proceedings.

Facultative compensation
One of the parties has a choice of claiming or opposing the compensation but waives his objection thereto such
as an obligation of such party is with a period for his benefit alone and he renounces the period to make the
obligation become due.
Facultative compensation is unilateral and does not require mutual agreement; voluntary or conventional
compensation requires mutual consent.
e.g. X owes Y P100,000 demandable and due on Apr. 1, 2012. Y owes X P100, 000 demandable and due on or before
Apr. 15, 2012. Y, who was given the benefit of the term, may claim compensation on Apr. 1, 2012. On the other hand,
X, who demands compensation, can be properly opposed by Y because Y could not be made to pay until Apr. 15,
2012.

Renunciation of compensation
Compensation can be renounced expressly or impliedly. It can also be renounced either at the time an obligation is
contracted or afterwards. It rests upon a potestative right, and a unilateral declaration of the debtor would be
sufficient renunciation.

6. NOVATION
It is the substitution or change of an obligation by another, resulting in its extinguishment or modification,
either by changing the object or principal conditions, or by substituting another in the place of the debtor or by
subrogating a third person to the rights of the creditor (Pineda, 2000).

Requisites of novation (OIC –SN)

1. Valid Old obligation;

XPNs:
a. When the annulment may be claimed only by the debtor and he consented to the novation; and
b. When ratification validates acts which are voidable.
2. Intent to extinguish or to modify the old obligation;
3. Capacity and consent of all the parties to the new obligation (except in case of expromission where the old
debtor does not participate);
4. Substantial difference of the old and new obligation – on every point incompatible with each other (implied
novation); and
5. Valid New obligation.

NOTE: If the new obligation is void, the original one shall subsist as there is no novation. However, even if the
new obligation turns out to be void, the original obligation does not subsist if the parties clearly intended that
the former relation should be extinguished in any event (NCC, Art. 1297).

Presumption of Novation
Novation is never presumed; it must be proven as a fact either by:
1. Explicit declaration – if it be so declared in unequivocal terms; or
2. Material incompatibility – that the old and the new obligations be on every point incompatible with each other
(NCC, Art. 1292).

Express novation
Takes place only when the intention to effect a novation clearly results from the terms of the agreement or is
shown by a full discharge of the original debt (Jurado, 2010).

Implied novation
It is imperative that the old and new obligations must be incompatible with each other.
The test of incompatibility between the old and the new obligations is to determine whether or not both of them
can stand together, each having its own independence. If they can stand together, there is no incompatibility;
consequently, there is no novation. If they cannot stand together, there is incompatibility; consequently, there is
novation (Borja v. Mariano, G.R. No. L-44041, October 28, 1938).

NOTE: Novation is never presumed and the animus novandi (intent to make a new obligation) whether totally
or partially, must appear by express agreement of the parties or by their acts that are too clear and unequivocal
to be mistaken.

Two-fold functions of novation

1. It extinguishes the old obligation; and
2. Creates a new obligation in lieu of the old one.

Kinds of novation
1. As to essence
a. Objective or real novation – changing the object or principal conditions of the obligation (NCC, Art.
1291).

NOTE: In payment of sum of money, the first obligation is not novated by a second obligation
that:
(1) Expressly recognizes the first obligation;
(2) Changes only the terms of payment;
(3) Adds other obligation not incompatible with the old ones; or
(4) Merely supplements the first one.

b. Subjective or personal novation – change of the parties.

i. Substituting the person of the debtor (passive novation) – may be made without the
knowledge of or against the will of the latter, but not without the consent of the creditor.
e) Delegacion – the substitution is initiated by the old debtor himself (delegante) by convincing
another person (delegado) to take his place and to pay his obligation to the creditor (1996, 2001
BAR).
f) Expromission – the substitution of the old debtor by a new debtor is upon

2. As to form of their constitution

a. Express – the parties declared in unequivocal terms that the obligation is extinguished by the new
obligation.
b. Implied – no express declaration that the old obligation is extinguished by the new one. The old and
new obligation is incompatible on every material point (NCC, Art. 1292).

3. As to extent of their effects

a. Total or extinctive – obligation is originally extinguished.
NOTE: Four requisites of extinctive novation:
(1) A previous valid obligation;
(2) An agreement of all parties concerned to a new contract;
(3) The extinguishment of the old obligation; and
(4) The birth of a valid new obligation (Iloilo Traders v. Heirs of Soriano, G.R. No. 149683, June 16,
2003).

The extinctive novation would thus have the twin effects of first, extinguishing an existing
obligation and second, creating a new one in its stead.
b. Partial or modificatory – original obligation is not extinguished but merely modified.

4. As to their origin
a. Legal novation – by operation of law (NCC, Art. 1300 & 1302).
b. Conventional novation – by agreement of the parties (NCC, Arts. 1300-1301).

5. As to presence of absence of condition

a. Pure – new obligation is not subject to a condition.
b. Conditional – when the creation of the new obligation is subject to a condition.

Rights of the new debtor

1. With the debtor’s consent – right of reimbursement and subrogation.

2. Without the consent of the old debtor or against his will – right to beneficial reimbursement.

Novation by substitution of debtor

The consent of the creditor is mandatory both in delegacion and expromission (NCC, Art. 1293). It may be express
or implied from his acts but not from his mere acceptance of payment by a third party, for there is no true
transfer of debt.
NOTE: Creditor’s consent or acceptance of the substitution of the old debtor by a new one may be given at
anytime and in any form while the agreement of the debtor subsists (Asia Banking Corp. v. Elser, G.R. No. L-
30266, March 25, 1929).
Requisites of delegacion
1. Substitution is upon the initiative or proposal of the old debtor himself by proposing to the creditor the entry
of another (third person) as the new debtor who will replace him in payment of the obligation;
2. The creditor accepts and the new debtor agrees to the proposal of the old debtor;
3. The old debtor is released from the obligation with the consent of the creditor.

Insolvency of the new debtor in delegacion

GR: Insolvency of the new debtor (delegado), who has been proposed by the original debtor (delegante) and
accepted by the creditor (delegatario), shall not revive the action of the latter against the original obligor (NCC,
Art. 1295).
XPNs: Original debtor shall be held liable:
1. Insolvency was already existing and of public knowledge, or known to the debtor; (NCC, Art. 1295)
2. Insolvency of the new debtor was already existing and known to the original debtor at the time of the
delegation of the debt to the new debtor (NCC, Art. 1295).

Requisites of expromission
1. Substitution is upon the initiative or proposal of a third person who will step into the shoes of the debtor;
2. Creditor must give his consent to the proposal of the third person;
3. Old debtor must be released from the obligation with the consent of the creditor.

Insolvency of the new debtor in expromission

If substitution is without the knowledge or against the will of the debtor, the new debtor’s insolvency or non-
fulfillment of the obligation shall not give rise to any liability on the part of the original debtor. (NCC, Art. 1294).
NOTE: If the old debtor gave his consent and the new debtor could not fulfill the obligation, the old debtor
should be liable for the payment of his original obligation.

DELEGACION EXPROMISSION
Person who Old debtor Third person
initiated the
substitution
Consent of It may be express or implied from his acts but not from his mere
the creditor acceptance of payment by a third party.
Consent of With the consent of the old debtor With or without the knowledge of
the old (since he initiated the the debtor or against the will of the
debtor substitution). old debtor.
Consent of Consent is needed but it need not Consent is needed.
third person be given simultaneously.
Intention of Released from the obligation with the consent of the creditor.
substitution
Rights of the With the debtor’s consent – right With the debtor’s consent – right of
new debtor of reimbursement and reimbursement and subrogation.
subrogation. Without the consent of the old debtor
or against his will – right to
beneficial reimbursement.
Insolvency or Shall not revive the action of the
nonfulfillme latter against the original obligor.
nt of the Original debtor shall be held
obligation of liable:
the new 1. Insolvency was already existing
debtor and of public knowledge, or
known to the debtor.
2. Insolvency of the new debtor
was already existing and known
to the original debtor at the time
of the delegation of the debt to
the new debtor.
With the debtor’s consent - If the old
debtor gave his consent and the new
debtor could not fulfill the
obligation, the old debtor should be
liable for the payment of his original
obligation.
Without the consent of the old debtor
or against his will – the new debtor’s
insolvency or non-fulfillment of the
obligation shall not give rise to any
liability on the part of the original
debtor.

Q: SDIC issued to Danilo a Diners Card (credit card) with Jeannete as his surety. Danilo used this card
and initially paid his obligations to SDIC. Thereafter, Danilo wrote SDIC a letter requesting it to upgrade
his Regular Diners Club Card to a Diamond (Edition) one. As a requirement of SDIC, Danilo secured from
Jeanette her approval and the latter obliged. Danilo's request was granted and he was issued a Diamond
(Edition) Diners Club Card. Danilo had incurred credit charged plus appropriate interest and service
charge. However, he defaulted in the payment of this obligation. Was the upgrading a novation of the
original agreement governing the use of Danilo Alto's first credit card, as to extinguish that obligation?
A: YES. Novation, as a mode of extinguishing obligations, may be done in two ways: by explicit declaration, or by
material incompatibility.
There is no doubt that the upgrading was a novation of the original agreement covering the first credit card issued to
Danilo Alto, basically since it was committed with the intent of cancelling and replacing the said card. However, the
novation did not serve to release Jeanette from her surety obligations because in the surety undertaking she
expressly waived discharge in case of change or novation in the agreement governing the use of the first credit card
(Molino v. Security Diners International Corp., G.R. No. 136780, August 16, 2001).

Effects of novation
1. Extinguishment of principal also extinguishes the accessory, except:
a. Mortgagor, pledgor, surety or guarantor agrees to be bound by the new obligation (Tolentino, 1999);
b. Stipulation made in favor of a third person such as stipulation pour atrui (NCC, Art. 1311) unless beneficiary
consents to the novation (NCC, Art. 1296).

2. If old obligation is:

a. Void – novation is void (NCC, Art. 1298)
b. Voidable – novation is valid provided that the annulment may be claimed only by the debtor or when
ratification validates acts (NCC, Art. 1298).
c. If the old obligation was subject to a suspensive or resolutory condition, the new obligation shall be under the
same condition, unless it is otherwise stipulated. (NCC, Art. 1299).

3. If old obligation is conditional and the new obligation is pure:

a. If resolutory and it occurred – old obligation already extinguished; no new obligation since nothing to novate.
b. If suspensive and it did not occur – it is as if there is no obligation; thus, there is nothing to novate.

4. If the new obligation is:

a. Void – original one shall subsist, unless the parties intended that the former relation should be extinguished in
any event (NCC, Art. 1297).
b. Voidable – novation can take place, except when such new obligation is annulled. In such case, old obligation
shall subsist.
c. Pure obligation – conditions of old obligation deemed attached to the new, unless otherwise stipulated
(Tolentino, 1999).
d. Conditional obligation:
i. If resolutory– valid until the happening of the condition (NCC, Art. 1181).
ii. If suspensive and did not materialize – no novation, old obligation is enforced. (NCC, Art. 1181).

NOTE: Novation does not extinguish criminal liability (PNB v. Soriano, G.R. No. 164051, October 3, 2012).
Subrogation
It is the active subjective novation characterized by the transfer to a third person of all rights appertaining to
the creditor in the transaction concerned including the right to proceed against the guarantors or possessors of
mortgages and similar others subject to any applicable legal provision or any stipulation agreed upon by the
parties in conventional subrogation.
NOTE: 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
(NCC, Art. 1237).
Kinds of subrogation
1. As to their creation
a. Legal subrogation – constituted by virtue of a law (NCC, Art. 1300; NCC, Art. 1302);
b. Voluntary or conventional subrogation – created by the parties by their voluntary agreement (NCC, Art. 1300);

NOTE: Conventional subrogation of a third person requires the consent of the original parties and of the third
person (NCC, Art. 1301);
2. As to their extent
a. Total subrogation – credits or rights of the creditor in the transaction are totally transferred to the third
person.
b. Partial subrogation – only part of the credit or rights of the creditor in the transaction are transferred to the
third person.

NOTE: 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 (NCC, Art. 1304).
Presumption of legal subrogation
GR: Legal subrogation is not presumed (NCC, Art. 1300).
XPN: In cases expressly mentioned in the law:
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. (NCC, Art. 1302).

Conventional subrogation v. Assignment of credit

BASIS CONVENTIONAL ASSIGNMENT OF CREDITS OR

SUBROGATION
Governing law Art. 1300-1304
Effect It extinguishes the original
obligation and creates a new
one
Need for consent of The consent of the debtor is
debtor necessary (NCC, Art. 1301).
Effectivity Begins from the moment of
subrogation.
Curability of defect The defect in the old
or vice obligation may be cured such
that the new obligation
becomes valid.
Defense Debtor cannot set up a
defense against the new
creditor which he could have
availed himself of against the
old creditor.
RIGHTS
Art. 1624-1627
The transfer of the credit or right does
not extinguish or modify the obligation.
The transferee becomes the new
creditor for the same obligation.
The consent of the debtor is not
necessary. Notification is enough for
the validity of the assignment
(NCC, Art. 1626).
Begins from notification of the debtor.
The defect in the credit or rights is not
cured by its mere assignment to a third
person.
The debtor can still set up the defense
(available against the old creditor)
against the new creditor