DISCUSSION BOARD the 11% interest of net profit from Dianne’s business
UNIT IV could be demanded and paid later on, when the amount
1A
What are some basic rules on how regular payment
should be made? Provide an example.
General Rule:
1. Payment must be complete (Article 1233).
2. The creditor or debtor cannot be compelled to accept
or make partial payments (Article 1248).
Exceptions:
1. Creditor waives complete performance (Article 1235)
2. Express stipulation (Article 1248)
3. Debt is partly liquidated and unliquidated (Article 1248)
Example: Dianne has an obligation to pay Olivia
P100,000. On maturity date, Dianne cannot compel Olivia
to accept P50,000 only for now, nor Olivia to compel
Dianne to pay P80,000 only for now.
Explanation: In relation to Article 1233, Dianne’s
obligation to pay Olivia is not considered extinguished if
she only paid her P50,000. The only time it will be
declared fulfilled is, if the whole P100,000 is finally given
by the debtor. In addition, as stated in Article 1248,
neither Dianne (debtor) nor Olivia (creditor) can oblige
each other to give or receive partial payment.
However, there are few exceptions to these articles. First,
if Olivia (obligee) accepts the partial payment without any
protest despite knowing its incompleteness, it is deemed
fully complied with. Also, if it is expressly stipulated that
the payment could be done partially, then partial payment
is valid and accepted. Lastly, if the debt is partly
liquidated and unliquidated, then partial payment is
applicable. Liquidated debt is the debt in which the
amount owed is known. On the other hand, unliquidated
debt is an amount to be paid that is still unknown. The
P100,000 debt of Dianne to Olivia is a liquidated debt
since the exact value to be given is known. However, if
part of the contract is, Dianne has to give Olivia P100,000
with an interest of 11% coming from the net profit of
Dianne’s business on 2021, then, the liquidated debt of
P100,000 could be demanded by Olivia or paid by
Dianne. On the other hand, the unliquidated debt which is
is finally determined.
Additional Rule: Substantial Performance in Good faith
(Article 1234)
Example: Nathaniel is bound to deliver 50 ladders to
Adrian. However, he honestly did not know that he was
only able to deliver 48 ladders. He only learned about his
incomplete performance when Adrian was checking the
number of items delivered. Adrian was rushing to ship the
ladders to a client the same day it was delivered, so he
had no choice but to ship these even when the client’s
order was incomplete.
Explanation: According to Article 1234, since Nathaniel
substantially performed his obligation to deliver the
ladders and he attempted to do it in good faith, meaning,
he had no intention to incompletely deliver the items, then
the performance is valid up to the number of items the
debtor is able to deliver. Hence, if one ladder costs P500,
since he was only able to deliver 48 pieces, then Adrian’s
payment to give would be P24,000 (48 x 500) less the
damages Adrian has incurred due to the 2 ladders that
Nathaniel failed to deliver in good faith. Let us say, Adrian
was supposed to sell the ladders for P600 each to the
client. Since the profit he should have gotten from those
two ladders was P200, then that will be subtracted to the
P24,000 that Adrian paid to Nathaniel since that is the
damage he incurred.
1B
Who are authorized to make regular payment? Elaborate.
Under article 1236, the authorized person to make regular
payment are generally 1. The debtor; 2. Any person who
has an interest in the obligation (like a guarantor); or 3. A
third person who has no interest in the obligation when
there is a stipulation that he can make payment. With the
same article, the creditor can refuse payment by a third
person when the third person is not interested in the
fulfillment of the obligation or does not intend to be
reimbursed by the debtor.
Effect of payment by a third person:
1. If made without the knowledge or against the will of
the debtor—as stated in article 1237, the payer can
only recover from debtor as the payment has been
beneficial to the latter, and the payer is not subrogated
to the rights of creditor.
According to article 1303, in subrogation, the
person who pays for the debtor is put into shoes of the
creditor. The payor could also have all other rights
which the creditor could have exercised pertaining to
the credit.
Example: Suppose Brown borrowed P50,000 from
Cindy, but Brown's friend, David, decided to pay the
obligation. Cindy can either refuse or accept the
payment. If Cindy accepts, then David 's right to
recover the payment is dependent to Brown's consent
on the payment.
Another scenario: Suppose David paid the P50,000
obligation to Cindy but, Brown had already paid
P30,000 of his debt to Cindy. Then David is entitled to
demand reimbursement only amounting to P20,000.
Meanwhile, the P30,000 can be recovered from Cindy,
who should not have accepted it on the first place.
2. If made with the knowledge of the debtor – the payer
shall have the rights of reimbursement and
subrogation; payer will recover all what has paid and
to acquire all the rights of subrogation to the
accessory obligations such as mortgage, guaranty or
penalty.
In article 1238, payment is made by a third person
who does not intend to be reimbursed by the debtor. If
debtor has consent to payment will be deemed as a
donation, but if debtor does not consent to payment,
debtor shall reimburse to the third person. However, in
any case the payment is valid as the creditor has
accepted it.
Example:  Suppose Brown requests David to
reimburse his obligation because of being insolvent,
then David has the right to demand reimbursement to
Brown and the rights of subrogation to the accessory
obligation such as mortgage, penalty, or guaranty.
2A
Who are authorized to accept regular payment?
Elaborate.
The people who are bound to accept regular payments
are stated in Art 1240 such as the creditor/obligee,
creditor’s successor in interest (heirs/assignee) and any
third person authorized by law or by the creditor such as
his agent, guardian, executor or even his administrator.
Moreover, Article 1241 also talks about that incapacitated
person or unauthorized person can be valid if the
incapacitated person kept the thing or if the payment has
been beneficial to the creditor. Say for an instance, If the
debtor paid 1,000,000 to an insane person who may be
classified as an incapacitated person ,however, the
incapacitated person still kept the payment, we can say
that the obligation is still extinguished or the payment is
still valid. Article 1242 also stipulated that anyone in
possession of the credit is authorized to accept payment.
Under what circumstances would it be necessary for the
creditor to have a guardian, agent, executor, or
administrator?
When the creditor is an incapacitated person (e.g. insane
who did not keep the thing that was delivered) or is
already deceased.
2B
Under what circumstances can payment be considered
invalid? Provide an example.
A payment can be considered invalid if:
The debtor do not have free disposal of the thing or
capacity to alienate it in obligations to give, such as if the
person is insane. For example, A agreed to sell to B a
suit. The owner of the suit is C, therefore, C can
recovered the item since the payment is not valid. A does
not have free disposal of the suit.
The debtor has been judicially ordered by court to retain
the debt to the creditor. For example, X owes Y P500,000
while Y owes Z P100,000. Y became insolvent and Z,
after trying all his means to get payment from Y, filed for
an accion subrogatoria. The court ordered X to retain the
debt which means Y will not receive payment from X
since he will give the payment to Z.
It is administered to an incapacitated person and he does
not kept the thing or benefited from the payment. The
payment of debtor can be done through his guardian or
representative, or the creditor himself if he recovers his
capacity to collect. For example, E paid his debt to F a
P500, the latter is a minor under guardianship. F later
spend the P300 in gambling and loses because of his
ignorance. Hence, the payment of E is only considered at
the value of P200. If F kept the money or spend it
usefully, then the payment is valid.

3A 2. One hundred pesos (P100.00) for denominations of 1-

What are the rules governing the use of legal tender and sentimo, 5-sentimo, 10-sentimo, and 25 sentimo
mercantile documents for payment? coins.
According to Article 1249 of the Civil Code of the
Philippines, if the obligation is monetary, then the
payment of the debtor should be in legal tender. Legal
tender is the currency that the debtor is required to pay
the creditor, and the creditor must accept the payment
(whether public or private). In the Philippines, legal tender
consists of  all the coins and notes issued by the Bangko
Sentral of the Philippines (BSP). Even so, according to
Republic Act No. 8183, the payment can be made in 3. All bills are still legal tenders up to any amount.
currency other than the Philippine legal tender if it is
stipulated to both parties.
 
However, there will be a limit of using the coins as the
payment even if it is a legal tender to lessen the burden of
the creditor to count huge amounts of coins. According to
Section 52 of Republic Act No. 7653, the creditor may not
accept the payment if it will go beyond what the law MERCANTILE DOCUMENTS
allows as payment. The following are the legal tender in Delivery of mercantile documents
the Philippines: According to Article 1249, the payment of the bills of
exchange or mercantile documents will be recognized
1. Ten centavos or less are legal tender for amounts not only when it is already in the form of cash or when it gets
exceeding up to P20.00. impaired through the creditor’s fault. 
2. 25 centavos and above are legal tender for amounts  
up to P50.00. Check not a legal tender
3. All bills are legal tenders up to any amount.
A check is not a legal tender, whether it is a manager’s
  check or an ordinary check so it is not considered as a
Subsequently, in pursuant to Section 52 of Republic Act valid tender of payment. The creditor cannot be
No. 7653 and Monetary Board Resolution No. 862, the compelled to accept them. Since a negotiable instrument
BSP Monetary Circular No. 537 adjusted the maximum is only a substitute for cash, and not cash, so the delivery
amount of coins to be considered as legal tender: of such cannot be counted as a payment. The obligation
1. One thousand pesos (P1,000.00) for denominations of is not extinguished and remains suspended until the
1-Piso, 5-Piso and 10-Piso coins. payment by commercial document is actually realized.
(Bank of the Philippine Islands vs. Sps. Royeca, G.R. No.
176664, July 21, 2003).
 
Rules in the payment of check
A check is not a legal tender of payment except:
1. When a manager’s check was handed over to the
court in which the clerk of the court endorsed it to the
Provincial Treasurer and was acknowledged by the
bank and was then credited to the treasurer’s
account. 
2. When it is for the purpose of repurchasing the debtor’s
property that the creditor accepted the check, then 
the following day, the creditor can no longer decline to
accept the check as payment. The creditor is under
estoppel since accepting the check gives birth to the
assumption that he has consented to that form of
payment.
3. When after the payment of the check in court the
vendor a retro, the vendee a retro requested the
court's permission to withdraw the amount in deposit,
then the payment in check is valid;
4. When the value of the check is lost through the
creditor’s fault, such as unreasonably delaying the
presentation of the check with the drawee bank for
payment, then the payment in check is valid.
5. When the value for the foreign bill of exchange is lost
due to the failure of the creditor to make a protest. If
the creditor was able to protest in a timely manner
then the debtor could have pursued the right recourse
against the parties who are secondarily liable.
Example of negotiable instruments:
So, if the debtor owes P8,000 to the creditor and offers to
pay the entire amount in Philippine coins, would this
tender of payment be considered valid under our current
rules? Explain.
No, sir. Paying the entire P8,000.00 in Philippine coins is
not allowed because based on BSP Monetary Circular
No. 537, peso coins (1-piso, 5-piso, and 10 piso) is
allowed for only up to P1,000.00 amount of payment and
centavo coins (1-sentimo, 5-sentimo, 10-sentimo, and 25-
sentimo) is allowed for only up to P100.00 amount of
payment.
Bills like P20.00, P50.00, P100.00, P200.00, P500.00,
and P1000.00 are the legal tenders that is allowed to pay
P8,000.00 and more.
3B
How is dation legally different from cession?
Dation in payment or dacion en pago is when a property
or asset of the debtor is being transferred to the creditor
to pay the amount of the debtor's debt, wherein the
property being transferred to the creditor's ownership also
becomes the price of the debtor's debt. Here, the debtor
might not be insolvent or has the capacity to pay in
monetary value, but he just chooses to pay in items or in
property. It is usually governed by the law on sales.
However, payment by cession is where the debtor
abandons all his property to the creditors for their benefit.
In this form of payment, it affects all the properties of the
debtor but the creditor serves only as the selling agent of
the properties so that its proceeds will cover up the debt
of the debtor; but even though the creditors are able to
sell the debtor's properties, the ownership of those
properties still belongs to the debtor.

More differences between Dation and Cession:
According to Art. 1245, there is usually only one creditor
in dation; but in cession, there are several creditors.
According to Art. 1255, the debtor may cede or assign his
property to his creditors in payment of his debts. This
cession, unless there is stipulation to the contrary, shall
only release the debtor from responsibility for the net
proceeds of the thing assigned.
According to Art. 1291(1), dation is really an act of
novation, while cession is not an act of novation.
4A
What are the requisites and procedures for proper
consignation?
Consignation is a special form of payment that generally
requires a prior tender of payment wherein the debtor
deposits the thing or amount due to the court or judicial
authorities whenever the creditor cannot accept or
refuses to accept payment. A prior tender of payment
refers to the debtor’s act of offering the thing or amount
due to the creditor that must comply with the rules on
regular payment to be considered valid. Although
consignation can be done without a prior tender of
payment in accordance to Art. 1256, if the creditor is:
absent, unknown, or did not appear at the place of
payment; cannot receive the payment at due date or
incapacitated; or refuses to give receipt without just
cause. No prior tender payment is also required if there
are two or more persons who claim the right to collect and
if the title of the obligation is lost.
On the other hand, the requisites for a proper and valid
consignation are the following: 1) there must be an
existence of a valid debt due (1256); 2) the valid prior
tender of payment from the debtor was refused by the
creditor without a justifiable reason (1256); 3) there must
be a previous notice of consignation to the parties
interested in the performance of obligation (1257); 4) an
actual consignation of the thing or amount due (1258); 5)
a subsequent notice of consignation to interested parties
(1258). To illustrate, consider this example. On January
1, debtor A agreed that he will deliver a laptop to creditor
C on January 30 in exchange for 50,000. When the due
date arrived, debtor A successfully delivered the laptop
that he owes to creditor C, however creditor C refuses to
accept the laptop debtor A delivered without giving a
justifiable reason. This will now result to debtor B having
the option to properly perform his obligation through
consignation.
If the debtor's duty happens to be in the form of
service (i.e., obligation to do), would consignation be
possible if the creditor should unjustly refuse to accept
the service offered?
Payment of consignation is not possible if the creditor
should unjustly refuse to accept the service the debtor
owes. This is because according to Article 1256, the
debtor shall only be released from his responsibility by
the consignation of a thing or a certain amount due. The
article failed to mention or include performances or
services due.
In addition, the debtor cannot perform his obligation to
serve or perform what they have agreed upon to the court
to fulfill his obligation. This is because payment of
consignation requires the debtor to deposit the thing or
amount due to the court or judicial authorities whenever
the creditor cannot accept or refuses to accept payment.
4B
What are the rules governing application of payments?
There are rules governing the application of payments,
which are shown in Article 1252 to Article 1254. First, only
one debtor and one creditor is allowed for the application.
Second, debts shall also be greater than two and those
debts shall be of the same kind. These debts shall be due
unless it is stipulated that the party may apply. Application
is only allowed if the debts due cannot be covered by the
payment due to insufficiency. Another rule for the
applications is that the debtor may direct an application of
the payments to any accounts he would like to choose at
the time of the payment, his choice may not be unilateral
revoked. If the debtor did not express what particular
obligation should be done to which the payments should
be applied, the creditor shall choose the application. If
both parties did not use its right to choose, the court will
decide to apply the payment which obligation is the most
onerous to the debtor. If all debts are equal, then
application of payments should be done to all the
obligations proportionally.
 For example: Person A has the following obligations to
person b, first is 10,000, second is 15,000, and third is
another 15,000 but with a 5% per annum interest. On the
time of payment person A has the first choice and must
indicate which of the 3 obligations that he/she will pay for.
This time she picked the first obligation, thus the first
obligations will be prioritized. But if the debtor didn’t
exercise his right to choose, the creditor may choose on
what obligations may the debtor will pay for example the
creditor may pick the second  obligation instead of
the first obligation. If both the debtor and creditor didn’t
specify which of the 3 obligations will be prioritized, the
court may choose between the 3 obligations based on
which is the most onerous of the 3. In this case
the third obligation because this obligation is a 15,000
that bears a 5% interest per annum which is the most
difficult to pay between the 3 obligations.
5A
How does condonation/remission extinguish an
obligation? Provide an example.
Condonation or Remission is the gratuitous renunciation
by the creditor of his right against the debtor leading to
the extinguishment of the latter’s obligation in its entirely
or some part of it. It is considered as a form of donation.
There are five requisites of condonation or remission (Art
1187) (Art. 1270)
1. It must be gratuitous (Requires nothing from the
debtor or the creditor would not receive any benefit by
granting condonation);
2. It must be accepted by the debtor;
3. The parties must have capacity (The parties must not
be insane or under civil interdiction)
4. It must not be in officious
5. If made expressly, it must comply with the forms of
donation
There is also a legal assumption that remission
presupposes that the obligation is and continue to be,
demandable at the time of remission (8 Manresa 365.)
Example: A and B entered a 5-year loan contract,
wherein A is the debtor and B is the creditor. In the
3rd year of the loan agreement, A faced financial
difficulties since his son had been hospitalized. B
recognizing the difficulty of A in paying the loan
agreement had decided to extinguish the agreement with
A’s consent. B would then forego the remaining three
years of the interests and the remaining principal that A
would have to pay.
Remission of the principal obligation shall extinguish the
accessory obligation; but the remission of the accessory
obligation still lets the principal obligation to be enforced
(Art. 1273). There is also a disputable assumption that
the accessory obligation had been remitted when thing
pledged, after its delivery to the creditor, had already
been in the possession of the debtor or the third person
who owns the thing (Article 1274)
Example (Article 1273): C and D entered a sale
agreement concerning a laptop along with a laptop bag
which is the accessory obligation. C had already paid in
full to D. D is expected to deliver the laptop along with the
laptop bag the next week. Due to personal
circumstances, C had decided to leave the country next
week and is not expected to receive the laptop by next
week and he cannot ask for a refund due to his busy
schedule. Due to this reason, C had decided to remit the
obligation of D for the laptop. This means that D is not
required to deliver the laptop bag since the principal
obligation had already been extinguished.
5B
How does confusion/merger extinguish an obligation?
Provide an example.
Article 1275. The obligation is extinguished from the time
the characters of creditor and debtor are merged in the
same person. 
Confusion or Merger is a meeting in one person of the
qualities of the creditor and the debtor with respect in the
same obligation. (e.g. the debtor itself becomes his own
creditor, therefore the enforcement becomes absurd). In
this case, the law considers such confusion or merger as
a mode of extinguished obligation
There are requisites in order for the Confusion or Merger
to become valid/extinguished an obligation:
1. The qualities of the creditor and the debtor must be
merged into one or must be in the same person
2. The obligation must take place between the principal
creditor and the principal debt/debtor
3. The transfer of qualities in confusion or merger must
be complete or definite (does not necessarily include
the entire obligation)
Example: Lisa owes Php 3,600 from Cindy, however, Lisa
is not able to pay his debt on the expressed due date for
which she executed a promissory note in favor of Cindy.
Cindy indorsed the promissory note to James. Lisa is now
selling her iPad in which James bought but instead of
paying cash, he indorsed the promissory note back to
her. (In this case, Lisa owes herself and her obligation is
extinguished by merger.)
Article 1276. Merger which takes place on the person of
the principal debtor or creditor benefits the guarantors.
Confusion which takes place in the person of any of the
latter does not extinguish the obligation.
Such merger or confusion of right of the principal creditor
and the principal debtor shall benefit the guarantor. (e.g.
the guarantor, who stands to answer the debt of the
debtor in case of insolvency will no longer fulfill the duties
of being a guarantor). However, as the effect of merger to
the guarantor, the creditor can assign his credit to the
guarantor which makes him the new creditor. In this case
the contract of guaranty is extinguished, leaving the
principal obligation in force.  to Chloe will extinguish the whole obligation, therefore,
Example:
1. Jasmine is indebted to Kaye with Lee as a guarantor.
Kaye assigns her right to Joy, then Joy to Kat, and Kat
assigns her right to Jasmine. Therefore, Jasmine’s
obligation is extinguished. Lee is also released from
his obligation and he was benefitted. (This shall
benefit the guarantor). However if there will changes;
2. Jasmine is indebted to Kaye with Lee as a guarantor.
Kaye assigns her right to Joy, then Joy to Kat, and Kat
assigns her right to Lee. Therefore, Jasmine still has
to pay Lee. The contract of guaranty is extinguished
but not the obligation.  covers one. The objective of compensation is to prevent
Article 1277. Confusion does not extinguish a joint
obligation except as regards the share corresponding to
the creditor or debtor in whom two characters concur.  Example: On January 1, Mark borrowed P10,000 from his
In terms of Joint Obligation, such confusion will only
extinguish the proportionate part of the creditor or debtor
in the entire obligation. However if the debtors executed a
promissory note to the creditor, and the creditor indorsed
it to another creditor which in turn, indorsed it to one of
the debtors, the debtor who receives the indorsed
promissory note will now become the new creditor.
Therefore, the remaining debtors are now liable to the
debtor who becomes the new creditor.
While in Solidary Obligation, such confusion will
extinguish the entire obligation because there is a merger
between the other solidary debtors. In this situation, the
obligation of one is the obligation of all, therefore an
indorsement to any of the solidary debtors will extinguish
the entire obligation. However, it is not the original
obligation which has been extinguished but the confusion
itself.
Example: Jay, Kate and Chloe are jointly indebted to May
of Php 5,000 executed in a promissory note. May,
indorsed the note to Brile who, in turn, indorsed it to
Chloe. 
The joint obligation of Chloe is extinguished because of
the confusion in her person, however the obligation of Jay
and Kate will remain because there is no confusion in
their person.
But if Jay, Kate and Chloe are solidary, the indorsement
she now can demand for the proportionate shares of Jay
and Kate.
6A
How does compensation/set-off extinguish an obligation?
Provide an example.
According to Article 1278, compensation simultaneously
balances the obligations of both parties, who are principal
debtors and creditors of each other, in order to extinguish
said obligations depending on whether they are of the
same amount or to an amount in which that of the other
unnecessary litigations and payments through the mutual
extinguishment, by operation of law, of concurring debts
between two parties.
best friend, Ethan, to buy new materials for his art project.
Consequently, on March 10, Ethan borrowed P3,500 from
Mark to buy a birthday present for his Mother. Both debts
are due and payable today. Since both parties are
debtors of each other, Mark's debt of P10,000 can be
partially compensated, or reduced, by Ethan's debt of
P3,500. In simple terms, instead of paying the P3,500,
Ethan may choose to reduce Mark's debt as
compensation for the former's debt. Hence, Mark shall be
liable for only P6,500.
On the other hand, if the two debts are of the same
amount, there is total compensation. For example, Mark
and Ethan owe each other P10,000, which are due and
payable today.  The debts of both parties are
extinguished, without the actual transfer of money, since
they are automatically set-off or compensated by the
same amount.
In what instances would compensation be considered
improper?
There are 4 instances where compensation is considered
improper or is not allowed by law according to the Article
1287 and 1288:  steal Mark's tablet and phone, which is worth P15,000 in
1. Where one of the debts arises from depositum - unlike
original bank deposit, depositum is a loan creating the
relationship of a debtor and creditor through
safekeeping and returning the same. This instance
can be illustrated when Anthony owes Emma
P3,000.00. Emma, in turn, owes Anthony the same
amount representing the value of the jewelry
deposited by Anthony with her, which she failed to
return. Even if Anthony fails to pay his obligation to
Emma, she cannot claim legal compensation. The
only thing that Emma needs to do in Anthony's default
of payment is to file an action against the latter for the
recovery of the amount of P3,000.00. Emma’s claim
for compensation against Anthony will lead to breach
of the confidence in their fiduciary relationship.
2. Where one of the debts arises from a commodatum -
Commodatum is a gratuitous contract wherein one of
the parties lend a thing that is not consumable and is
to be used and returned at a certain time by the other.
3. Where one of the debts arises from an obligation to
support - Support comprises everything that is
indispensable for sustenance (i.e., dwelling, clothing,
medical attendance, education and transportation, and
sustaining the family's financial capacity). The right to
support cannot be renounced, transmitted to third
persons, or compensated with what the recipient owes
the obligor.
Example: Amy, a minor, is the daughter of Ella, who,
under the law, is entitled to support Amy. Amy borrowed
P3,000 from Ella to buy a new batch of face and hair care
products. Ella cannot compensate her obligation to
support Amy by what the latter owes her (i.e., Ella stops
feeding Amy for a considerable amount of time as
compensation for the P3,000 that Amy owes Ella). The
right to receive support cannot be compensated because
it is essential to the recipient's life. 
1. Where one of the debts arises from a criminal offense
- Compensation is improper and inadvisable when one
of the debts consists in a civil liability arising from a
criminal offense, since the satisfaction of such
obligation is imperative. 
Example: Mark owes Ethan P15,000. Ethan decides to
total. Ethan cannot claim the stolen items as
compensation for Mark's debt to him. However, as the
offended party, Mark can claim the right of compensation
since the prohibition of Article 1288 pertains only to the
accused and not the victim of the crime. 
6B
What are the different kinds of compensation? Elaborate.
Compensation involves the extinguishment of the existing
debts of two persons equally indebted to each other, and
equivalently debtors and creditors of each other.
Subsequently, there are kinds of compensation by its
extent or effect (total, semi-complete, partial) and by its
origin or cause (legal, voluntary, judicial, facultative);
whereas kinds of compensation by its extent or effect
discern which and how much obligation shall be
extinguished, and kinds of compensation by its origin or
cause evaluate on whoever shall decide for the
compensation as well as to whose reason it started.
KINDS OF COMPENSATION
By its extent or effect
Total Compensation, according to Article 1281, happens
when both parties’ obligations are equally of the same
amount and will be completely extinguished.
Semi-complete and Partial Compensation happens when
there are different amounts in multiple obligations.
In a Semi-complete Compensation, the smaller debt is
fully extinguished while only a part of the larger debt is
extinguished.
In a Partial Compensation, on the other hand, larger or
smaller, it only extinguishes a part on both debt, thus,
does not fully extinguish either of the debt.
By its origin or cause
Legal Compensation happens through operation of law
when all requisites from Article 1279 are present. It
operates even both parties are unaware of the
compensation or if without consent, this will still
extinguish both debts to the concurrent amount. This
compensation happens ipso jure, meaning the effects of
this will arise immediately once all requisites were
concurred.
Conventional Compensation happens through the
agreement of both parties to compensate their mutual
obligation, even when not all requisites from Article 1279
were concurred. This is intended to get rid of and
prevent ipso jure extinguishment of the obligations.
Judicial Compensation is one that is ordered by the court.
It happens when the parties are in contrast to each other
whereas one refuses to admit, thus, the other invokes it
by filing a lawsuit to have it fixed by the court.
Facultative Compensation is a unilateral choice because
it can be set up by only one of the parties where only
he/she may claim or oppose the compensation and there
is no need any more for a mutual agreement or the
permission of the other party.
Again, there are different types of Compensation:
according to its effect or extent (total, semi-complete,
partial), wherein the type of compensation distinguishes
which obligation and how much of the obligation will be
extinguished; and according to its origin or cause (legal,
voluntary, judicial, facultative), wherein the type of
compensation regards to who decides on the
compensation or by whose reason it started.
7A
How does novation extinguish an obligation? Provide an
example.
Based on Article 1291, a novation is the extinguishment
of an obligation by replacing the old obligation with a new
obligation through the following instances:
• If there are changes with the principal conditions of the
old obligation.
• Substitution of a new debtor from the former debtor.
• Subrogation or the transfer of rights to a third person
from the creditor.
Furthermore, based on Article 1292, novation is never
presumed, for it is effective only when clearly expressed
in the agreement through stipulation. Novation could also
be effective if the old and new obligations are proven
incompatible with each other.
For example: X agreed to deliver to Y a car. Later, they
entered into another contract whereby, instead of X
delivering a car, he would deliver 10 air conditioners. The
obligation to deliver a car is extinguished by the obligation
to deliver the 10 air conditioners. The change may involve
the principal terms of the obligation.
7B
What are the various forms of novation? Elaborate.
KINDS OF NOVATION
According to origin:
 Legal Novation – Arises from operation of law.
 Conventional Novation – Requires consent or
agreement by both of the parties.
According to how it is constituted:
 Express – when parties declared in unequivocal
terms the replacement of the old obligation with
the new obligation.
  Implied – when there is no express declaration
that the old obligation will be replaced by new
one.
According to extent or effect:
 Total or Extinctive – when the original obligation
is completely extinguished. There is no novation
when the parties involved in the old obligations is
not the same anymore in the new obligation.
 Partial or Modificatory – when the changes in old
obligations is not totally extinguished but only
modified partially.
According to Subject:
 Real or Objective – happens when there is a
change in the object or principal conditions of the
obligation
 Subjective or Personal – happens when there is
a substitution of the debtor or there is a
subrogation of a third person to take place in the
rights of the creditor
 Mixed novation – happens when objective and
subjective novation are combined. Wherein, there
is a change in object/principal condition and the
debtor/creditor was replaced as well.