LECTURE NOTES (ARTICLES 1278 TO 1304)

Section 5 KINDS OF COMPENSATION

COMPENSATION
Art. 1278. – Compensation shall take place when
two persons, in their own right, are creditors and
debtors of each other.
Compensation – reciprocal extinction of claims
between mutual debtors. (Lao and Manansala vs
Special Plans, Inc. GR No. 164791, Jun 29, 2010)
As to cause or origin:
1. Legal – takes place by operation of law and
need not be pleaded; if all requirements are
present, legal compensation takes place
REQUISITES
a. Each of the obligors is bound principally,
and that he be at the same time a principal
creditor of the other

- Extinguishment in the concurrent amount of the b. Both debts consist in a sum of money, or
obligations of those persons who are reciprocally if the things due are consumable, they be
debtors and creditors of each other. of the same kind, and also of the same
quality if the latter has been stated
COMPENSATION VS PAYMENT
COMPENSATION PAYMENT c. Two debts are due
Partial extinguishment Must be complete and
is always permitted indivisible as a rule d. They be liquidated and demandable

True compensation Involves action or e. Over neither of them there be any

takes place by delivery retention or controversy commenced by
operation of law. third persons and communicated in due
time to the debtor (Art. 1279; Associated
Bank vs Tan, GR No. 156940, Dec 14,
COMPENSATION VS MERGER 2004)
COMPENSATION MERGER
There must be two There is only one 2. Voluntary or conventional – due to the
persons who are person in whom is agreement of the parties
mutually creditor and merged the qualities of - Occurs when the parties agree to the
debtor to each other creditor and debtor mutual extinguishment of their credits or
to compensate their mutual obligations
There must be at least There can only be one even in the absence of some of the legal
two obligations obligation requisites. (Mavest (USA) Inc., et al. vs
Sampaguita Garment Corporation, GR No.
127454, Sept 1, 2005)
USEFULNESS OF COMPENSATION
To abbreviate payment which gives to each of the REQUISITES
parties a double advantage: a. Each of the parties can dispose of the
1. Facility of payment credit he seeks to compensate
2. Guaranty for the effectiveness of the credit b. They agree to the mutual establishment of
because if one of the parties pays even their credits (United Planters Sugar Milling
without waiting to be paid by the other, he Co. Inc. vs CA, et al., GR No. 126890, Apr
could easily be made a victim of fraud or 2, 2009)
insolvency
3. Judicial (or “set-off”) – can be made effective
It is simplified or abbreviated payment because the only by a order from the court; must be
two debts are extinguished without requiring the pleaded
transfer of money or property from one party to the
other. 4. Facultative – one of the parties has the choice
of claiming the compensation or of opposing it
(perhaps because not all the requisites of legal
compensation are present)

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 LECTURE NOTES (ARTICLES 1278 TO 1304)
E.g.
A owes B P1M due and demandable on Jan
12, 2004. B owes A P1M due and demandable
on or before Jan 31, 2004. On Jan 12, 2004, B
who was given the benefit of the term, may
claim compensation because he could then
choose to pay his debt on said date, which is
on or before Jan 31, 2004. On the other hand,
if A claims compensation, B can properly
oppose it because B could not be made to pay
until Jan 31, 2004.
As to effect or extent:
5. Total – when the two debts are of the same
amount; hence, complete extinguishment of
obligation
6. Partial – when the two debts are not of the
same amount; hence, a balance remains on
the larger debt
Example where no compensation exists
FACTS: X owns shares of stock in Bank Z worth P10k.
Later, X borrowed money from Bank Z amounting to
P10k including interests. When the loan fell due, X
was not able to pay the loan. X wanted to compensate
the loan with his shares of stock in Bank Z.
ISSUE: Can debtor’s debt be compensated with the
shares of stock he owns?
HELD: There can be no compensation because the
owning shares of stock does not create a debtor-
creditor relationship.
A stockholder’s indebtedness to a banking
corporation cannot be compensated with the amount
of his shares in the same institution, there being no
relation of creditor with regards to such shares.
(Garcia vs Lim Chu Sing, 59 Phil 562)
NOTE: It would have been different had the
corporation really been his debtor as when he had
paid it a sum greater than the value of his shares.
(Brimo vs Goldenberg and Co., 40 OG [6th S] No. 10,
p. 199)
Art. 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 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.
AFFIRMATIVE AND NEGATIVE REQUISITES
Items 1, 2, 3 and 4 of Art. 1279 are affirmative
requisites for legal compensation; while the following
are negative requisites for legal compensation:
1. Item 5 of Art. 1279
2. There must have been no waiver of the
compensation
3. Compensation of the debts must not have
been prohibited by law.
FIRST AFFIRMATIVE REQUISITE
“That each of the obligors be bound principally, and
that he be at the same time a principal creditor of the
other.”
1. There must be a relationship of debtor and
creditor
2. There must be two debts and two credits
3. They must be generally bound as principals
and not in their representative capacity, such
as:
a. Guardians
b. Partners in a partnership
c. Guarantor
SECOND AFFIRMATIVE REQUISITE
“That both debts consist in a sum of money, or if the
things due are consumable (fungible), they be of the
same kind, and also of the same quality if the latter
has been stated.”
The word “consumable” must be taken to mean a
“fungible” (susceptible of substitution, if such be the
intention).
E.g.
A owes B a fountain pen (generic). B also owes A a
fountain pen (generic). There can be compensation
here because the objects are fungible (although no
consumable).
Had specific fountain pens be agreed upon, there can
be no compensation (legal compensation).
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 LECTURE NOTES (ARTICLES 1278 TO 1304)
Ten sacks of corn cannot be compensation (legal
compensation) for ten sacks of rice.
THIRD AFFIRMATIVE REQUISITE
“That the debts be due”
“Due” means that the period has arrived, or the
condition has been fulfilled. On the other hand,
“demandable” may refer to the fact that neither of the
debts has prescribed or that the obligation is not
invalid or illegal.
E.g.
Q: Solita owes Edmundo P1M payable Apr 1, 2005.
Edmundo owes Solita P1M payable Jun 8, 2005. Can
there be legal compensation on Apr 1, 2005?
A: No, for one of the debts is not yet due. However,
there can be voluntary compensation upon
agreement. (Art 1282)
FOURTH AFFIRMATIVE REQUISITE
“That they be liquidated and demandable”
Meaning of “demandable,” the same as “due.”
If one of the debts has already prescribed, there can
be no compensation for the simple reason that said
debt is no longer demandable.
“Liquidated” debts are those where the exact amount
has already been determined, though not necessarily
in figures since capacity of being arrived at by simple
arithmetical processes would be enough. If damages
are asked for, and the amount is disputed, the debt
cannot be said to be already a “liquidated” one. Once
liquidated by a judgment, however, a set-off asked for
in a counterclaim would be proper.
Compensation takes place only if both obligations are
liquidated. Therefore, it cannot take place if one’s
claim against the other is still the subject of court
litigation. (Salinap vs Judge del Rosario, GR 50638,
Jul 25, 1983)
FIRST NEGATIVE REQUISITE
“That over neither of the debts must there be any
retention or controversy commenced by third persons
and communicated in due time to the debtor.”
E.g.
A owes B P100k and B owes A P100k, but A’s credit
of P100k has been garnished by C who claims to be
an unpaid creditor of A. B has been duly notified of
the controversy. There can be no compensation here.
Any possible compensation is in the meantime
suspended. If C wins his claim, there can be no
compensation; if he loses, the controversy is
resolved, and compensation can take place.
Art. 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
This is an exception to Art. 1279, par 1, because a
guarantor is subsidiarily, not principally, bound.
Reason for the law: Extinguishment (partial or total) of
principal obligation extinguishes (partially or totally)
the guaranty (which is merely an accessory
obligation).
Example 1
A owes B P500k. C is the guarantor of A. B owes A
P100k. When B sues A and A cannot pay, for how
much will C be liable?
C will be liable for only P400k, because he can set up
the P100k credit of A as the basis for partial
compensation.
Example 2
A owes B P500k. C is the guarantor of A. B owes C
P500k. When B sues A for P500k, may A successfully
put up the defense of compensation in that, after all,
his creditor B owes his guarantor C the same
amount?
There can be no compensation here because in the
obligation which C guaranteed for A, C is not bound in
his own right. Neither is A the creditor of B.
If A cannot pay and B sues the guaranty, C will not be
liable anymore because the obligation of guaranty has
been extinguished by compensation.
Art. 1281. – Compensation may be total or partial.
When the two debts are of the same amount, there
is total compensation.
The Article is true for all kinds of compensation,
whether voluntary, legal, etc.
Art 1282. – The parties may agree upon the
compensation of debts which are not yet due.
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 LECTURE NOTES (ARTICLES 1278 TO 1304)
This Article applies to conventional or voluntary
compensation. Requisites under Art. 1279 do not
apply.
It is sufficient in conventional compensation that the
agreement or contract which declares the
compensation should itself be valid. Thus, among
other things, the parties must have legal capacity and
must freely give their consent.
Art. 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.
This Article refers to judicial compensation or set-off.
Pleading and proof of the counterclaim must be
made. Also, all requisites mentioned in Art. 1270
must be present except that at the time of pleading,
the claim need not yet be liquidated. The liquidation or
the fixing of the proper sum must be made in the
proceedings.
Unless pleading and proof are made, the court cannot
on its own accord, declare the compensation because
our rules on civil procedure apply suppletorily only.
Compensation takes place by the judgment as to the
date the compensation was pleaded.
Art. 1284. – When one or both debts are rescissible
or voidable, they may be compensated against each
other before they are judicially rescinded or voided.
Rescissible and voidable debts are valid until
rescinded or voided; hence, compensation is allowed.
Rescissible contract is based on lesion (damage)
while voidable contract is based on vitiated consent or
incapacity to give consent.
Rescissible contracts can be found in Article 1381.
Voidable or annullable contracts can be found in
Article 1390.
Art. 1285. – The debtor who has consented to the
assignment of rights made by a creditor in favor of a
third person, cannot set up against the assignee the
compensation which would pertain to him against
the assignor, unless the assignor was notified by the
debtor at the time he gave his consent, that he
reserved his right to the compensation.
If the creditor communicated the cession to him but
the debtor did not consent thereto, the latter may
set up the compensation of debts previous to the
cession, but not of subsequent ones.
If the assignment is made without the knowledge of
the debtor, he may set up the compensation of all
creditors prior to the same and also later ones until
he had knowledge of the assignment.
Assignment of rights – transfer of rights, especially
contractual rights, from one party to another.
Reason for the Article: To prevent fraudulent
deprivation of benefits of total and partial
compensation.
EFFECTS OF ASSIGNMENT OF RIGHTS
1. Assignment with consent of debtor (Par 1) –
Compensation cannot be set up because there
has been consent and therefore, a waiver.
EXCEPTION: If the right to compensation that
has already taken place is reserved.
E.g.
A owes B P1M. B in turn owes A P200k.
Because both debts are already due, and
because all other requisites for legal
compensation are present, both debts are
extinguished automatically up to the amount
of P200k. Later, however, B, with the consent
of A, assigned his P1M credit to C. How much
can C collect successfully from A?
A: C can collect from A the whole P1M. A
cannot set up the defense of compensation as
to the P200k in view of his consent to the
assignment.
Had A reserved his right to the compensation,
A would be forced to give only P800k.
NOTE: Par. 1, Art 1285 applies whether the
consent to the cession was BEFORE or AFTER
the debts became compensable.
2. Assignment made with knowledge but without
the consent or against the will of the debtor –
Compensation can be set up regarding debts
previous to the cession or assignment, i.e.
before the NOTICE. Here, legal compensation
has already taken place.
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 LECTURE NOTES (ARTICLES 1278 TO 1304)
E.g.
A owes B P1M. B owes A P200k. Both debts
are already due. Later, B, with the knowledge
but without the consent (or against the will) of
A, assigned the P1M credit to C. How much
can C successfully collect from A?
A: If A sets up the defense of partial
compensation as to previously maturing
debts, C can collect only P800k. There had
already been compensation with respect to the
P200k.
3. Assignment made without knowledge of the
debtor – Debtor can set up compensation as a
defense for all debts maturing PRIOR to his
knowledge of the assignment, whether the
debts matured before or after the assignment.
E.g.
Q: A owes B P1M. B owes A P200k. Both
debts are already due. Later, B assigns the
P1M credit to C, without the knowledge of A.
This assignment was made on Jul 1. On Jul
15, a P250k debt of B in favor A matured. A
learned of the assignment on Aug 1. On Aug
23, a P150k debt of B in favor of A matured.
Later, C asks A to pay his debt. How much
can C successfully collect from A?
A: C can collect P550k because A can set up
defense of partial compensation regarding the
P200k and the P250k debts, or the debts
which had matured and were therefore
compensable PRIOR to his knowledge of the
assignment. But A cannot setup the last dept
of P150k for partial compensation because
this matured only AFTER he knew of the
assignment.
Art. 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.
COMPENSATION BY OPERATION OF LAW
- “Indemnity for expenses of transportation”
applies to transportation of goods or of the object
- “Indemnity for expenses of exchange” refers to
monetary exchange in case the debts are money
debts
E.g.
A owes B P1M payable in Manila and B owes A P1M
payable in England. 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.
Art. 1287. – Compensation shall not be proper when
one of the debts arises from a depositum or from the
obligations of a depository or of a bailee in
commodatum.
Neither can compensation be set up against a
creditor who has claim for support due by gratuitous
title, without prejudice to the provisions of
paragraph 2 of Article 301.
WHEN LEGAL COMPENSATION CAN’T TAKE PLACE
1. When one debt arises from a depositum (not
bank deposit, for this is really a loan)
- Purpose is to prevent breach of trust and
confidence.
- It is the depositary who cannot claim
compensation. The depositor is allowed to
so claim
- Deposit is constituted from the moment a
person receives a thing belonging to
another, with the obligation of safely
keeping it and of returning the same. If the
safekeeping of the thing delivered is not
the principal purpose of the contract, there
is no deposit but some other contract.
(Art. 1962)
2. When one debt arises from the obligations of
a depositary. This has the same reason as the
preceding one. Depositor is given the right to
claim compensation.
3. When one debt arises from the obligations of
a bailee in commodatum, the borrower of a
property who pays nothing for the loan.
- Lender may claim compensation, the
borrower is not allowed to do so.
- In the three instances given above, since
the depositor and the lender have an
option to claim or not to claim
compensation, we have clear instances of
facultative compensation.
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 LECTURE NOTES (ARTICLES 1278 TO 1304)
4. When one debt arises because of a claim for
support due to gratuitous title
- Support in arrears may be compensated
but not future support, for this is vital to
the life of the recipient.
- While compensation cannot be made use
by one party (e.g., the depositary),
compensation may be claimed by the
other party (e.g. the depository). This kind
of compensation, whereby only one side
can claim it but not the other, is referred
to as facultative compensation.
5. Debts consists in civil liability arising from
penal offense.
Example 1
A has a P1M savings deposit with PNB. One day, A
borrowed P200k from PNB. Without asking
permission from A, the bank deducted P200k from
A’s account, leaving a balance of P800k in A’s favor.
Is the bank’s action proper.
Yes. Compensation is allowed here because in this
case, the relationship between the bank and the
depositor is that of debtor and creditor. (Art. 1980)
Example 2
A asked B to keep P1M for him. Now, A is indebted to
B for the amount of P400k. When A asks for the
return of his money, B gives him only P600k, alleging
partial compensation. Is B correct?
No, B is not correct because the P1M deposit with
him is not subject to compensation. (Art. 1287, p1)
Art. 1288. – Neither shall there be compensation if
one of the debts consists in civil liability arising from
a penal offense.
REASON FOR THE PROVISION
Satisfaction of such obligation is imperative.
VICTIM CAN CLAIM COMPENSATION
While the criminal cannot claim compensation, the
victim is allowed to do so. This should be specifically
limited to the accused to prevent his escaping liability
by pleading prior credits against that of the offended
party. But not to the victim of a crime who happens to
be indebted to the accused. (Justice JBL Reyes) This
is an instance of facultative compensation.
Art. 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.
Cross-refer to provisions of the Civil Code on
Application of Payments (Arts. 1252 to 1254)
Read the case of Steve Tan & Marciano Tan vs Fabian
Mendez, Jr., GR No. 138669, Jun 2, 2002.
Art. 1290. – When all 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.
AUTOMATIC COMPENSATION IF ALL REQUISITES
ARE PRESENT
Legal compensation takes place automatically unless
there has been valid waiver thereof.
Compensation which extinguishes principal
obligations also extinguishes accessory obligations.
“To the concurrent amount” means that if one debt is
larger than the other, the balance subsists as debt.
For application of Art. 1290, read the following:
1. International Corporate Bank, Inc. vs IAC, et
al., GR No. 69560, Jun 30, 1988
2. BPI and Romero vs CA and Reyes, GR No.
116792, Mar 29, 1996
Section 6
NOVATION
Art. 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 right of the
creditor.
Novation – substitution or change of an obligation by
another, which extinguishes or modifies the first,
either changing its object or principal condition, or
substituting another in place of the debtor, or
subrogating a third person in the right of the creditor.
- It is a mode of extinguishing an obligation by
changing the object or principal creditor or by
substituting the person of the debtor.
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 LECTURE NOTES (ARTICLES 1278 TO 1304)
- Burden to prove the defense that an obligation
has been extinguished by novation falls on the
debtor. (Agrifina Aquintey vs Spouses Tibong, GR
No. 166704. Dec 20, 2006)
- No form of words or writing required
REQUISITES
1. Existence of a valid old obligation
- If old obligation is void, there is nothing to
novate
- If old obligation is voidable, novation is still
possible provided the obligation has not
yet been annulled.
2. Intent to extinguish or to modify the old
obligation by a substantial difference
(extinguishment or modification itself is a
result of novation)
3. Capacity and consent of all parties, except in
the case of expromision where the old debtor
does not participate
4. Validity of the new obligation
- If the new obligation is subject to a
suspensive condition, such as the
obtaining of some signatures, and the
condition does not materialize, such new
obligation never became valid or effective,
so no novation has resulted. (Martinez vs
Cavives, 25 Phil 581)
- If the contemplated new obligation is
embodied in a mere draft, which is
unsigned and therefore not consented to,
no new obligation is created because of
the absence of novation. (Vaca vs Kosca,
26 Phil 388)
Boysaw, et al. vs Interphil Promotions, et al.
GR No. 22590, Mar 20, 1987
The consent of the creditor to the change of debtors
whether in expromision or delegacion, is an
indispensable requirement. Substitution of one debtor
for another may delay or prevent the fulfillment of the
obligation by reason of the inability or insolvency of the
new debtor. Hence, the creditor should agree to accept
the substitution in order that it may be binding on him.
KINDS OF NOVATION
As to object or purpose
1. Real or objective – changing the object or the
principal conditions of the obligation (Art. 1291,
par1)
2. Personal or subjective – change of persons
a. Substituting the person of the debtor
(expromision)
b. Subrogating a third person in the
rights of the creditor (change of
creditor may be by agreement –
“conventional subrogation,” or by
operation of law – “legal subrogration”)
3. Mixed – Made either by changing the object or
the principal conditions and by substituting the
person of the debtor or subrogating a third
person to the rights of the creditor.
E.g.
X obliged himself to deliver a particular laptop to Y.
Subsequently, X and Y agreed that instead of
delivering the laptop, X will deliver two particular
cellphones to W. Note that there is a change in the
person of the creditor and the object of the obligation.
According to the form of its constitution
1. Express – new obligation declares in
unequivocal terms that the obligation is
extinguished
2. Implied - when the two obligations are
essentially incompatible with each other
Test of incompatibility – whether the two
obligations can stand together, each one with
its own independent existence. If they cannot,
they are incompatible and the latter obligation
novates the first. Corollarily, changes that
breed incompatibility must be essential in
nature and not merely accidental. The
incompatibility must take place in any of the
essential elements of the obligation, such as
its object, cause or principal conditions;
otherwise, the change would be merely
modificatory in nature and insufficient to
extinguish the original obligation.
According to extent or effect
1. Total or extinctive novation – old obligation is
completely extinguished
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 LECTURE NOTES (ARTICLES 1278 TO 1304)
2. Partial or modificatory – imperfect or improper
novation
Here, the old obligation is merely modified;
thus, it still remains in force except insofar as
it has been modified. Should there be any
doubt as to whether the novation is total or
partial, it shall be presumed to be merely
modificatory.
E.g.
There was novation of the terms of the three
promissory notes in that the interest was waived and
the principal was payable in monthly installments of
USD750. Alterations of the terms and conditions of
the obligation would generally result only in
modificatory novation unless such terms and
conditions are considered to be the essence of the
obligation itself. The resulting novation in this case
was, therefore, of the modificatory type, not the
extinctive type, since the obligation to pay a sum of
money remains in force.
As to origin
1. Legal – takes place by operation of law
2. Conventional – takes place by stipulation of
parties.
E.g.
Q: W had been borrowing money from Y who was
engaged in informal money lending. Between the
months of August to December 1992, as was usual in
the normal course of their transactions, W issued
several checks payable to Y, in exchange for cash
received. Due to business reverses suffered by W, the
checks were, however, dishonored for the reason that
the “Account Closed.”
Y demanded from W the settlement of her P749k
obligation.
W’s husband, H, later paid the amount of P200k
representing initial payment on the account of W with
the undertaking to settle the balance within one year
via monthly installments.
More than two and a half years later, as W had not
settled her outstanding obligation, Y filed on
September 4, 1996, a complaint for violation of BP 22
against her involving 120 dishonored checks
amounting to P746,250.
W maintained that her obligations under the various
checks had been released spearheaded and novated
by her husband’s assumption of her liabilities.
ISSUE: Had novation taken place?
HELD: The novation which W suggests as having
taken place, whereby H was supposed to assume her
obligation as debtor, is neither express nor implied.
There is no showing of Y explicitly agreeing to such a
substitution, nor of any act of her from which an
inference may be drawn that she had agreed to
absolve W from her financial obligations and to
instead hold H fully accountable. (Azarcon vs People
of the Philippines and Gonzales, GR No. 185906, Jun
29, 2010)
Art. 1292. – In order that an obligation may be
extinguished by another which substitutes the same,
it is imperative that it be so declared in unequivocal
terms, or that the old and the new obligation be on
every point incompatible with each other.
HOW IMPLIED NOVATION IS MADE
By making substantial changes:
1. In the object or subject matter of the contract
(e.g. delivery of a car instead of a diamond
ring)
2. In the cause or consideration of the contract
(e.g. an upward change in the price);
reduction of prince implies a remission
3. Principal terms or conditions of the contract,
e.g:
a. Debt subject to a condition is made an
absolute one without a condition
b. Reduction of the term or period
originally stipulated
c. Without the consent of some
subscribers, the capital stock of a
corporation is increased. Here, the
subscribers who did not consent to the
increase are released or freed from
their subscription
NOTE: Novation thru change of the object, cause or
principal terms and conditions is not presumed. Clear
proof of novation must be given.
INSTANCES WHEN THE COURT HELD THAT THERE
WAS NO EXTINCTIVE NOVATION
(here, the original contract or obligation remains,
subject only to the slight modifications introduced.
Here, only a modificatory novation has been effected.
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 LECTURE NOTES (ARTICLES 1278 TO 1304)
1. Slight alterations or modifications in the
construction plans of a building
2. New contract merely contains supplementary
agreement
3. Additional interest is agreed upon
4. Additional security is given
5. After a final judgment, a contract was entered
into precisely to provide a method of payment
other than that stated in the judgment
But the SC held that if the object of the new
contract is to settle the judgment by reducing
the amount stated in the judgment, and by
stipulating an attorney’s fees in case of non-
payment, and by inserting a penalty clause,
the judgment may be considered to have been
novated. (Fua Cam Lu vs Yap Fauco, 74 Phil
287)
6. When a guarantor enters into an agreement
with the creditor that the guarantor will also be
a principal debtor. Here, the original principal
debtor is not released from his obligation.
7. When the creditor in the meantime refrains
from or forbears from suing the debtor, or
even when the creditor merely extends the
term of payment, for here, the period merely
affects the performance, not the creation of
the obligation.
However, guarantors who do not consent to
the extension of term are released from their
obligation of guaranty by express provision of
the law, and not because of any extinctive
modification.
8. Place of payment is changed or when there is
a variation in the amount of partial payment
9. Public instrument is executed to confirm a
valid contract, whether oral or in a private
instrument
10. Payment of the purchase price for certain
trucks is made by the execution of a
promissory note for said price. Here, there is
no novation of the contract of sale.
Art. 1293. – Novation which consists in substituting
a new debtor in the place of the original one, may be
made even without the knowledge or against the will
of the latter, but not without the consent of the
creditor. Payment by the new debtor gives him the
rights mentioned in Articles 1236 and 1237.
KINDS OF PERSONAL OR SUBJECTIVE NOVATION
1. Change in debtor (passive)
2. Change in creditor (active
NOTE: A substitution of debtor without the consent of
the creditor is binding upon the parties to the
substitution but not on the creditor. (De Cortes vs
Venturanza, 79 SCRA 709)
SUBSTITUTION OF DEBTOR
1. Expromision – initiative comes from a third
person; essential that the old debtor be
released from his obligation, otherwise, there
will be no expromision, no novation.
REQUISITES
1. Initiative must come from a third person who
will be the new debtor
2. New debtor and the creditor must consent
3. Old debtor must be excused or released from
his obligation. The old debtor’s consent or
knowledge is not required. (Art. 1293)
E.g.
D owes C P1M. F, friend of D, approaches C and tells
him, “I will pay you what D owes you. From now on,
consider me your debtor, not D. D is to be excused. C
agrees. There is expromision here.
E.g.
D owes C P1M. F, friend of D, approaches C and tells
him, “I will pay you what D owes you.” C agrees.
There is NO EXPROMISION, no novation because they
did not agree that D would be released from his
obligation. If F does not pay C, C will still be allowed
to collect from D.
2. Delegacion – initiative comes from the debtor,
for it is he who delegates another to pay the
debt, and thus, he excuses himself. Here, the
parties concerned – the old debtor, the new
debtor, and the creditor – must agree. Old
debtor must be released from the obligation;
otherwise, there is no valid delegacion.
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 LECTURE NOTES (ARTICLES 1278 TO 1304)
PARTIES IN DELEGACION
1. Delegante – original debtor
2. Delegatario – creditor
3. Delegado – new debtor
REQUISITES OF DELEGACION
1. Initiative comes from old debtor
2. All parties concerned must consent or agree.
Consent of the creditor:
a. May be given in any form
b. May be express, or may be implied
from his acts but not from his mere
acceptance of payment by a third
party, for there is no true transfer of
the debt here.
c. May be before or after the new debtor
has given his consent
d. May be conditional but the condition
has to be fulfilled, otherwise, there is
no valid delegacion.
RIGHTS OF THE NEW DEBTOR
1. Beneficial reimbursement (Art 1236) if
payment was made without the knowledge or
against the will of the old debtor
2. Reimbursement and subrogation (Art 1237) if
it was made with the old debtor’s consent.
E.g.
X owes Y P10k. Subsequently, X asked Y if the latter
would agree that his brother Z will pay the P10k
obligation of X so that Z will become the new debtor
and that X will be released from his obligation. Y
agreed. Also, Z consented. In this case, the obligation
is extinguished because of delegacion so that if Z
later on will not pay, X is no longer liable. Take note
that the initiative of paying comes from the old
debtor, X, himself.
Art. 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
obligation shall not give rise to any liability on the
part of the original debtor.
This refers to expromision where 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 because of the initiative came from a third
person.
WHY THE OLD DEBTOR WILL NOT BE RESPONSIBLE
FOR NEW DEBTOR’S INSOLVENCY OR NON-
FULFILLMENT
The expromision was brought about without old
debtor’s initiative.
Art. 1295. – The solvency 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 he
delegated his debt.
This Article refers to delegacion. It only deals only
with insolvency, and not with other causes of non-
fulfillment.
REQUISITES TO HOLD OLD DEBTOR LIABLE
1. Insolvency was already existing and of public
knowledge at the time of delegacion.
2. Insolvency was already existing and known to
the debtor at the time of delegacion.
NOTE: If the insolvency occurred only after the
delegacion, the old debtor is not liable.
E.g.
X owes Y P10k. Subsequently, X asked Y if the latter
would agree that his brother Z will pay the P10k
obligation of X so that Z will become the new debtor
and that X will be released from his obligation. Y
agreed. Also, Z consented. In this case, the obligation
is extinguished because of delegacion so that if Z
later on becomes insolvent, X is no longer liable.
However, X will still be liable if said insolvency of Z
was already existing and of public knowledge when X
delegated the debt. Also, X will still be liable if said
insolvency is known to X when he delegated the debt.
Art. 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.
EFFECT OF NOVATION OF A PRINCIPAL OBLIGATION
ON ACCESSORY OBLIGATIONS
General Rule: When the principal obligation is
extinguished in consequence of a novation, the
accessory obligations are also extinguished.
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 LECTURE NOTES (ARTICLES 1278 TO 1304)
Exception: Accessory obligations or stipulations made
in favor of third persons (stipulation pour autrui [Art
1311]) remain unless said third persons have their
consent to the novation.
REASON FOR THE EXCEPTION
Their rights to the accessory obligations which for
them is really a distinct one, should not be prejudiced
without their consent.
Stipulation pour autrui will be discussed further in
Article 1311.
Art. 1297. – If the new obligation is void, the original
one shall subsist, unless the parties intended that
the former relation should be extinguished in any
event.
EFFECT IF THE NEW OBLIGATION IS VOID
There is no novation. Old obligation generally
subsists.
OTHER FACTORS
1. If the new obligation is subject to a condition
and said condition does not materialize, the
old obligation subsists. (Martinez vs Cavives,
25 Phil 581)
2. If a new obligation was intended, but the new
contract was never perfected for lack of
consent, old obligation continues. (Vaca vs
Kosca, 26 Phil 388)
3. If new obligation is voidable, old obligation is
novated because a voidable obligation is valid
until annulled.
4. If the new obligation is annulled, the old
obligation subsists, and whatever novation has
taken place will naturally have to be set aside.
EXCEPTION TO THE GENERAL RULE THAT THERE IS
NO NOVATION IF THE NEW OBLIGATIONI IS VOID
When the parties intended that the former relation
should be extinguished in any event. (Art 1297)
E.g.
Q: D and C entered into a contract whereby D was to
give C P800k cash. Later, they novated the contract
by stipulating that instead of cash, D would give a
particular car. Subsequently, the car was destroyed
by a fortuitous event. Is D obliged to give P800k?
A: No, because the original obligation had already
been extinguished by the valid novation. Moreover,
the obligation to deliver the particular car is also
extinguished because of the fortuitous event.
Art. 1298. – The novation is void if the original
obligation was void, except when annulment may be
claimed only by the debtor, or when ratification
validates acts which are voidable.
EFFECT IF OLD OBLIGATION WAS VOID
There is no valid obligation. If the old obligation was
merely VOIDABLE and has already been annulled,
there is no more obligation. Therefore, the novation is
also void.
RULE IF THE OLD OBLIGATION WAS VOIDABLE
If the old obligation was voidable and has not yet
been annulled, there may still be a valid novation.
1. Annulment may be claimed only by the debtor
E.g.
A was forced to sign a sign a promissory note to give
B P500k. Later, the parties agreed voluntarily to let
the subject matter be a precious stone. Although the
first contract was voidable, the second one is all right
because in the first contract, annulment could be
claimed only by the debtor.
2. Or when ratification validates acts which are
voidable
E.g.
An agent, acting without the authority from his
principal, bought merchandise from a company.
Shortly after he had learned of his agent’s act, the
principal told the seller to deliver another kind of
merchandise, completely different from the first. The
seller agreed. Although the first contract was
unauthorized, ratification by the principal has cured its
defects, and therefore the second contract is valid.
NOTE: Although Art 1298 speaks of a “void” original
obligation, it evidently refers to a “voidable” one,
where annulment or ratification may exist. A void
contract does not have to be annulled nor can it be
ratified.
RULE IF THE OLD OBLIGATION WAS EXTINGUISHED
BY LOSS
If the loss was purely because of a fortuitous event
without liability on the part of the debtor, the novation
is VOID for there would be no obligation to novate.
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 LECTURE NOTES (ARTICLES 1278 TO 1304)
If the loss made by the debtor liable, there is still an
existing monetary obligation that may be the subject
of novation.
PRESCRIBED OBLIGATION MAY BE SUBJECT OF
NOVATION
Failure to raise prescription amounts to a waiver.
EFFECT ON A VOIDABLE OBLIGATION OF NOVATION
BY EXPROMISION
Here, the debtor is released from his obligation to the
creditor, for the substitution was not done through his
initiative. But when the new debtor, after payment,
sues the old debtor for beneficial reimbursement, the
old debtor can set up whatever defenses he could
have set against the creditor (such as minority or
fraud).
Art. 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.
GENERAL RULE: Conditions attached to the old
obligation are also attached to the new obligation.
EXCEPTION: If there is contrary stipulation.
E.g.
X obliged himself to give Y a cellphone if Y passes the
CPA board exam. Subsequently, X and Y agreed that
instead of giving a cellphone, X will give a specific
laptop. Is the giving of the laptop subject to the same
suspensive condition (passing the CPA board exam)?
Yes, X will deliver the laptop only if X Y passes the
CPA board exam.
Art. 1300. – Subrogation of a third person in the
rights of the creditor is either legal or conventional.
The former is not presumed, except in cases
expressly mentioned in this Code; the latter must be
clearly established in order that it may take effect.
Subrogation – (otherwise known as “extinctive
subjective novation by change of the creditor”) 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.
- Transfer of all the rights of the creditor to a third
person, who substitutes him in all his rights.
KINDS OF SUBROGATION
From the viewpoint of cause or origin
1. Conventional or voluntary subrogation –
requires an agreement and the consent of the
original parties and of the creditor (Art 1301)
2. Legal subrogation – takes place by operation
of law
From the viewpoint of extent
1. Total subrogation
2. Partial subrogation – needs two or more
creditors
*Legal subrogation is not presumed, except in the
case expressly mentioned in the law.
*Conventional subrogation must be established.
Otherwise, it is as if no subrogation has taken place.
Art. 1301. – Conventional subrogation of a third
person requires the consent of the original parties
and of the third person.
NOTE:
For conventional or voluntary subrogation, consent of
all the parties is required:
1. The debtor – because he becomes liable
under the new obligation; and because his old
obligation ends
2. Old creditor – because his credit is affected
3. New creditor – because he becomes a party to
the obligation
Generally, the debtor loses the right to present
against the new creditor any defense which the
debtor could have set up against the old creditor.
As between conventional subrogation and assignment
of credit, the latter, insofar as the creditor is
concerned, should be preferred, for it has advantages
without the corresponding disadvantages of
conventional subrogation. Upon the other hand,
conventional subrogation cannot present any
advantage over assignment of credit.
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 LECTURE NOTES (ARTICLES 1278 TO 1304)
CONVENTIONAL SUBROGATION vs
ASSIGNMENT OF RIGHTS
CONVENTIONAL ASSIGNMENT OF
SUBROGATION CREDIT
Extinguishes the Mere transfer of the
obligation, and creates same right or credit;
a new one the transfer did not
extinguish the credit
Requires the debtor’s Does not require the
consent debtor’s consent; mere
notification to him is
sufficient
Defect of the old Defect in the credit or
obligation may be cured right is not cured
in such a way that the simply by assigning the
new obligation same; here, the debtor
becomes entirely valid. generally still has the
Here, there is no right right to present against
to present against the the new creditor any
new creditor any defense available as
defense which he, the against old creditor.
debtor could have set
up against the old
creditor
Transfer of all rights of An agreement by virtue
the creditor to a third of which, the owner of
person, who substitutes a credit (the assignor),
him in all his rights by a legal cause – such
which takes place by as sale, dation in
agreement of the payment or exchange
parties or donation – and
without need of the
debtor’s consent,
transfer that credit and
its accessory rights to
another (the assignee),
who acquires the power
to enforce it, to the
extent as the assignor
could have enforced it
against the debtor.
Art. 1302. – It is presumed that there is legal
subrogation:
1. When a creditor pays another creditor who is
preferred, even without the debtor’s
knowledge;
2. When a third person, not interested in the
obligation, pays with the express or tacit
approval of the debtor;
3. When, even without the knowledge of the
debtor, a person interested in the fulfillment
of the obligation pays, without prejudice to
the effects of confusion as to the latter’s
share.
This Article speaks of a legal subrogation.
Example of Par. 1
X owes Y P500k secured by a real estate mortgage. X
also owes Z P200k. The obligation of X to Z has no
guaranty or security. Later, Z (ordinary creditor) pays
Y the P500k debt of X. In this case, Z will be
subrogated in the rights of Y which means that Z can
foreclose the mortgage in case of default by X.
Example of Par. 2
X owes Y P500k secured by a real mortgage. Z paid Y
the amount of P500k with the consent of X. In this
case, Z is subrogated in the rights of Y.
Example of Par. 3
X owes Y P500k secured by a real estate mortgage. It
is also secured by G, as guarantor. If G pays Y the
amount of P500k, G will be subrogated in the rights of
Y. Moreover, the contract of guaranty is extinguished.
Take note that G, being the guarantor is a person
interested in the fulfillment of the obligation.
Art. 1303. – Subrogation transfers to the person
subrogated the credit with all the rights thereto
appertaining, either against the debtor or against
third persons, be they guarantors or possessors of
mortgages, subject to the stipulation in a
conventional subrogation.
EFFECTS OF SUBROGATION
Credit and all the appurtenant rights, either against
the debtor, or against third persons, are transferred.
Thus, in a sense, the obligation subsists, i.e., it has
not yet been extinguished or paid
EXAMPLE OF THE EFFECT OF SUBROGATION
D owes C P1M. G is the guarantor. A stranger, S, paid
C the P1M with the consent of D and C. S is now
subrogated in the place of C. If D cannot pay the
P1M, S can proceed against the guarantor, G.
EFFECT OF PRESENCE OF SUSPENSIVE CONDITION
It is understood that if the transferred credit is subject
to a suspensive condition, the new creditor cannot
collect until after said condition is fulfilled.
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 LECTURE NOTES (ARTICLES 1278 TO 1304)

Art. 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.

Partial subrogation – Here, there are two creditors:

1. The old creditor who still remains a creditor as
to the balance, because only a part of the
payment has been made to him; and

2. The new creditor who is a creditor to the

extent of what he had paid the creditor.

E.g.
Q: A owes B P500k. With the consent of both, C pays
B P250k. Now B and C are the creditors of A to the
amount of P250k. Suppose A has only P250k, who
should be preferred

A: B, the original creditor, should be preferred

inasmuch as he is granted by the law (Art 1304)
preferential right to recover the remainder, over the
person subrogated in his place by virtue of the partial
payment of the same credit.

PREFERENCE IN THE ASSETS

The preference is only in the assets remaining with
the debtor, not those already transferred to others.
Therefore, the old creditor must assert his claim or
preference over the assets only while they are still in
the hands of the sheriff who has levied on the
properties. If done later, the preference given by this
Article ceases.

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