LOSS OF THE THING DUE

ARTICLE 1263. In an obligation to deliver a generic thing, the loss or destruction of anything of
LOSS – includes impossibility of performance the same kind does not extinguish the obligation

When is there a Loss: The obligation continues to exist because a generic thing does not really perish. (Genus
1. When the object perishes (physically, it is destroyed) nunquam perit – “genus never perishes”)
2. When it goes out of commerce
3. When it disappears it such a way that; Exception:
a.Its existence is unknown a. If the generic thing is delimited
b. Or it cannot be recovered b. If the generic thing has already been segregated or set aside, in which case, it has become
specific.
Impossibility of performance includes:
1. Physical impossibility ARTICLE 1264. The courts shall determine whether, under the circumstances, the partial loss of
2. Legal impossibility, which is either: the object of the obligation is so important as to extinguish the obligation.
a. Directly caused as when prohibited by law
b. Or indirectly caused as when the debtor is required to enter into military draft Effect of Partial Loss:
3. Moral impossibility (impracticability) In certain cases, partial loss may indeed be equivalent to complete loss. In other cases,
the loss may be insignificant. Hence, judicial determination of the effect is needed.

ARTICLE 1262. An obligation which consists in the delivery of a determinate thing shall be ARTICLE 1265. Whenever the thing is lost in the possession of the debtor, it shall be presumed
extinguished if it should be lost or destroyed without the fault of the debtor, and before he has that the loss was due to his fault, unless there is proof to the contrary, and without prejudice to
incurred in delay. the provisions of article 1165. This presumption does not apply in case of earthquake, flood,
storm, or other natural calamity.
When by law or stipulation, the obligor is liable even for fortuitous events, the loss of the thing
does not extinguish the obligation, and he shall be responsible for damages. The same rule *The debtor is presumed to be at fault.
applies when the nature of the obligation requires the assumption of risk.
When Presumption does NOT apply:
Two Kinds of Obligations “To give” a. In case of a NATURAL CALAMITY.
a. To give a generic thing b. Although fire is not a natural calamity, if tenant is able to prove that fire caused in his
b. Or to give specific thing apartment was purely ACCIDENTAL, he is not liable.

Effect of LOSS on an obligation to deliver a SPECIFIC THING ARTICLE 1266. The debtor in obligations to do shall also be released when the prestation
General Rule: The obligation is extinguished. becomes legally or physically impossible without the fault of the obligor.
Exceptions:
a. If the debtor is at fault Loss in Personal Obligations---without the debtor’s fault
b. When the debtor Is made liable for a fortuitous event because: a. Legal impossibility
1. Of a provision of law b. Or physical impossibility
2. Of a contractual provision
3. The nature of obligation requires the assumption of risk on the part of the debtor *Impossibility must be AFTER the constitution of the obligation.

When Claim of Loss must be Made: Effect of Loss Thru a Fortuitous event in Reciprocal Obligations
a. The claim is premature and speculative if made without basis General Rule: The obligation that was not extinguished by the fortuitous event remains.
b. The claim would, however, be proper if the claim was made because of prior Exceptions:
information or discover of shortage of or damage to the goods.

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 a. In case of lease, if the object is destroyed, both the lease and the obligation to pay rent are
extinguished
b. In contracts for piece of work, the contractor or worker cannot successfully ask for the
price if the thing be lost prior to delivery.
ARTICLE 1267. When the service has become so difficult as to be manifestly beyond the
contemplation of the parties, the obligor may also be released therefrom, in whole or in part.
*Refers to moral impossibility or impracticability due to change of certain conditions. ( Rebus sic
stantibus- a treaty or agreement remains valid only if the same conditions prevailing at the time
of contracting continue to exist at the time of performance)
*Only operative on personal obligations (to do) not on real obligations (to give).
Requisites:
a. The service must become so difficult that it was manifestly beyond the contemplation of
BOTH parties. The difficulty could NOT POSSIBLY have been anticipated or foreseen.
b. One of the parties must ask for relief.
c. The object must be a FUTURE service with FUTURE unusual change in conditions.
*To prevent double advantage
Example:
S is obliged to deliver his car to B. But X destroys the car. B has a right to sue X. The right is given
to B instead of S because otherwise S would unduly profit in that he will gain two things: first, his
obligation to give the car or its value is already extinguished; second, he would be allowed to
recover from X. It is obvious that S must not unduly profit at the expense of B.
CONDONATION OR REMISSION OF THE DEBT
ARTICLE 1270. Condonation or remission is essentially gratuitous, and requires the acceptance
by the obligor. It may be made expressly or impliedly.
One and the other kind shall be subject to the rules which govern inofficious donations. Express
condonation shall, furthermore, comply with the forms of donation.
*Inofficious- amount which would impair the legitime of compulsory heirs

ARTICLE 1268. When the debt of a thing certain and determinate proceeds from a criminal Remission or Condonation – It is the gratuitous abandonment by the creditor of his right
offense, the debtor shall not be exempted from the payment of its price, whatever may be the
cause for the loss, unless the thing having been offered by him to the person who should Example:
receive it, the latter refused without justification to accept it. Gloria owes Edgardo P5.00. When the debt matured, Edgardo told Gloria that she need not pay
the debt since he was condoning it. Gloria, in turn, expressed gratitude.
Effect of Loss in Criminal Offenses.
It does not extinguish the obligation. ESSENTIAL REQUISITES FOR REMISSION
a. There must be an agreement
Exception: b. The parties must be capacitated and must consent
When the creditor is in MORA ACCIPIENDI (default of part of the debtor) c. There must be subject matter
d. The cause or consideration must be liberality
Examples: e. The obligation remitted must have been demandable at the time of remission
a. A commits a crime of theft, and is asked to return the stolen car to its owner B If, before f. The remission must be inofficious
the car is delivered to B, it is destroyed by fortuitous event, A’s liability is NOT extinguished. g. Formalities are required in case of an express remission
b. Suppose A had previously asked the owner to accept the car, but the owner, without h. Waivers or remissions are not to be presumed generally. They must be clearly and
justifiable reasons refuses to accept the car and the car is later lost by a fortuitous event, A convincingly shown, either by express stipulation or by acts admitting of no other
could NO LONGER BE LIABLE because the creditor is in MORA AACCIPIENDI. reasonable explanation.
c. If the creditor refuses to accept, the criminal should either:
1. Consign the thing CLASSES OF REMISSION
2. Keep the thing and care for it with due diligence. (he will not be liable if the thing is lost As to its effect or extent:
through fortuitous event) 1. Total
2. Partial
ARTICLE 1269. The obligation having been extinguished by the loss of the thing; the creditor As to its date of effectivity
shall have all the rights of action which the debtor may have against third persons by reason of 1. Inter vivos (during life)
the loss. 2. Mortis causa (after death)
As regards to its form:

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 1. Implied or tacit
2. Express or formal
*If there be no acceptance, there would be no remission. However, if the creditor does not really
collect within the STATUTE OF LIMITATIONS, the debt may be said to have been extinguished by
PRESCRIPTION.
ARTICLE 1271. The delivery of a private document evidencing a credit, made voluntarily by the
creditor to the debtor, implies the renunciation of the action which the former had against the
latter.
If in order to nullify this waiver it should be claimed to be inofficious, the debtor and his heirs
may uphold it by proving that the delivery of the document was made in virtue of payment of
the debt.
*Speaks of private documents not public documents.
*2nd paragraph: Can only be availed if indeed payment was made
Example:
Steffi made a promissory note in favor of Agassi in amount of P100 million. After some time,
Agassi voluntarily delivered the promissory note to Steffi without collecting the P100 million. The
note Is now is Steffi’s possession. There is a disputable presumption that there has been
remission. The presumption is merely disputable and NOT CONCLUSIVE because it may be that
the instrument was delivered only for examination of Steffi or for collection.
ARTICLE 1272. Whenever the private document in which the debt appears is found in the
possession of the debtor, it shall be presumed that the creditor delivered it voluntarily, unless
the contrary is proved.
*PRESUMPTION OF VOLUNTARY DELIVERY
*speaks of private documents
PRESUMPTION IN JOINT or SOLIDARY OBLIGATION
Illustration: A and B owe C P100,000, evidenced by a private document.
a. If the private document is found in the possession of A, who is a JOINT debtor, the
presumption is only A’s debt has been remitted.
b. If the private document is found in the possession of A who is a solidary debtor, the
presumption is the whole debt has been remitted.
c. In both cases, the presumption MAY BE REBUTTED or be overcome by superior contrary
evidence.
ARTICLE 1273. The renunciation of the principal debt shall extinguish the accessory obligations;
but the waiver of the latter shall leave the former in force.
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*The renunciation of the principal extinguishes accessory, BUT NOT vice-versa. (Rule of
“accessory follows the principal”)
Example: A remission of penalty DOES NOT remit the principal obligation, but if the PRINCIPAL
DEBT IS CONDONED, the penalty is ALSO condoned.
ARTICLE 1274. It is presumed that the accessory obligation of pledge has been remitted when
the thing pledged, after its delivery to the creditor, is found in the possession of the debtor, or
of a third person who owns the thing.
CONFUSION OR MERGER OF RIGHTS
ARTICLE 1275. The obligation is extinguished from the time the characters of creditor and
debtor are merged in the same person.
Merger or Confusion – It is the meeting in one person of the qualities of creditor and debtor
with respect to the same obligation.
Reason or Basis for Merger – If the debtor is his own creditor, enforcement of the obligation
becomes absurd, since one cannot claim against himself.
REQUISITES OF VALID MERGER
a. It should take place between the principal debtor and creditor.
b. The merger must be clear and definite.
c. The very obligation involved must be the same or identical.
Example: A makes a check payable to bearer, and hands the check to C, who hands it to D who
finally hands it to A. Here, A owes himself. The obligation is extinguished.
*If the reason for confusion ceases, the obligation is REVIVED.
ARTICLE 1276. Merger which takes place in the person of the principal debtor or creditor
benefits the guarantors. Confusion which takes place in the person of any of the latter does not
extinguish the obligation.
Effect of Merger on Guarantors:
“Accessory follows the principal”. If there is a merger with respect to principal debt, the
guaranty is extinguished.
Examples
a. A owes B P700,000, guaranteed by C. B assigns his credit to X, X assign his credit to Y. Y
assigns his credit to A. A ‘s obligation to C is extinguished and C is RELEASED from his
obligation as guarantor.
 b. A owes B P700,000, guaranteed by C. B assigns his credit to X, X assigns his credit to Y. Y
assigns his credit to C. Here, A’s obligation to pay is not extinguished but the contract of
guaranty is extinguished.
ARTICLE 1277. Confusion does not extinguish a joint obligation except as regards the share
corresponding to the creditor or debtor in whom the two characters concur.
Merger in Joint Obligation
A and B jointly owe C P1,000,000. If C assigns the entire credit to A, A’s share is
extinguished, but B’s share remains. B would still owe A the amount of P500,000, since in joint
obligation, the debts are distinct and separate from each other.
COMPENSATION
ARTICLE 1278. Compensation shall take place when two persons, in their own right, are
creditors and debtors of each other.
Compensation
 It is sort of balancing between two obligations; it involves a figurative operation of weighing
two obligations simultaneously in order to extinguish them to the extent in which the
amount of one is covered by the other.
 It is the extinguishment in the concurrent amount of the obligations of those persons who
are reciprocally debtors and creditors of each other.
Usefulness of Compensation
a. Facility of payment
b. Guaranty for the effectiveness of the credit because if one of the parties pays even without
waiting to be paid by the other, he could easily be made victim of fraud or insolvency.
Compensation vs Payment
a. Payment must be COMPLETE and INDIVISIBLE as a general rule, in compensation PARTIAL
extinguishment is permitted.
b. Payment involves action or delivery; true compensation takes place by operation of law.
Compensation vs. Merger
a. As to number of persons, in merger/confusion there is only one person in whom is merged
the qualities of creditor and debtor. In compensation, there must be two person who are
mutually creditor and debtor to each other.
b. As to number of obligations, in confusion/merger, there can only be one. In compensation,
there MUST be two.
Compensation vs Counterclaim
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a. A set-off or a counterclaim must be pleaded to be effectual whereas compensation takes
place by mere operation of law, and extinguishes reciprocally the two debts as soon as
they exist simultaneously, to the amount of their respective sums.
b. A set-off or counterclaim works as sort of judicial compensation
KINDS OF COMPENSATION
a. According to its effect
1. Total-when both obligations are extinguished because they are same or equal amounts
2. Partial-when a balance remains
b. According to its origin or cause
1. Legal-takes place by operation of law, and need not be pleaded
2. Voluntary or conventional-agreed by the parties
3. Judicial (set-off)-must be pleaded; can only be made effective only by an order from the
court
4. Facultative-one of the parties has a choice of claiming the compensation or of opposing
it.
ARTICLE 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of
the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor.
*The requisites enumerated are those for LEGAL compensation; voluntary compensation in
general requires no requisite except that the agreement be voluntarily and validly entered into.
AFFIRMATIVE REQUISITES: 1,2,3,4 (Art 1279)
1. That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;
2. That both debts consist in a sum of money, or if the things due are consumable, they be of
the same kind, and also of the same quality if the latter has been stated;
3. That the two debts be due;
4. That they be liquidated and demandable;
NEGATIVE REQUISITES:
1. Over neither of the debts must there be any retention or controversy commenced by third
person and communicated in due time to the debtor.
2. There must have been no waiver of the compensation
3. The compensation of debt must not have been prohibited by law.

Prohibited Compensation:
1. Debts arising from depositum
2. Debts arising from the obligation of a depository
3. Debts arising from the obligation of a bailee in commodatum
4. Debts arising from a claim for future support due by gratuitous title
5. Debts consisting in criminal liability arising from penal offense
6. Damages suffered by a partnership thru the fault of a partner.
ARTICLE 1280. Notwithstanding the provisions of the preceding article, the guarantor may set
up compensation as regards what the creditor may owe the principal debtor.
*Exception to Article 1279 par 1, because a guarantor is SUBSIDIARILY, not principally bound.
Reason: Extinguishment of principal obligation extinguishes the guaranty.
Example: A owes B P500,000. C is the guarantor of A. B owes A P100,000. C will only be liable for
P400,000, because he can set-up the P100,000 credit of A as basis for partial compensation.
ARTICLE 1281. Compensation may be total or partial. When the two debts are of the same
amount, there is a total compensation.
ARTICLE 1282. The parties may agree upon the compensation of debts which are not yet due.
Conventional or Voluntary Compensation
a. The requisites mentioned in Art 1279 does not apply
b. It is sufficient in conventional compensation that the agreement or contract which declares
the compensation should itself be valid. The parties must have LEGAL CAPACITY and MUST
FREELY GIVE THEIR CONSENT
ARTICLE 1283. If one of the parties to a suit over an obligation has a claim for damages against
the other, the former may set it off by proving his right to said damages and the amount
thereof.
*Refers to judicial compensation or set-off
*All requirements in Art 1279 should be present, except that at the time of the pleading, the
claim need not yet be liquidated
*Unless pleading and proof are made, the court cannot of its own declare the compensation.
GENERAL RULE: The jurisdiction of the court depends upon the totality of the demand in all the
cause of action, irrespective of whether the plural cases arose out of the same or different
transactions.
ARTICLE 1284. When one or both debts are rescissible or voidable, they may be compensated
against each other before they are judicially rescinded or avoided.
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*Rescissible or voidable debts are valid until rescinded or voided; hence, the compensation is
allowed
ARTICLE 1285. The debtor who has consented to the assignment of rights made by a creditor in
favor of a third person, cannot set up against the assignee the compensation which would
pertain to him against the assignor, unless the assignor was notified by the debtor at the time
he gave his consent, that he reserved his right to the compensation.
If the creditor communicated the cession to him but the debtor did not consent thereto, the
latter may set up the compensation of debts previous to the cession, but not of subsequent
ones.
If the assignment is made without the knowledge of the debtor, he may set up the
compensation of all credits prior to the same and also later ones until he had knowledge of the
assignment.
Reason for the Article: To prevent of fraudulent deprivation of the benefits of total and partial
compensation.
Three Cases Covered by the Article
a. Paragraph 1 – The assignment may be made with the consent of the debtor
Effect: Compensation cannot be set-up (because there has been consent, therefore, a waiver)
Exception: If the right to the compensation is reserved
Example:
 A owes B P1,000,000. B in turn owes A P200,000. Because both debts are already due, and
because all other requisites for legal compensation are present, both debts are
extinguished automatically to the amount of P200,000. Later, however, B with the
CONSENT of A, assigned his P1,000,000 credit to C.
 Here, C can collect from A the whole P1,000,000. A cannot set-up the defense of
compensation as of the P200,000 in view of his consent to the assignment.
 (Had A reserved his right to compensation, A would be forced to only give P800,000)
b. Paragraph 2 – The assignment be made with the knowledge but without the consent or
against the will of the debtor.
Effect: Compensation can be set-up regarding debts previous to the cession or assignment. This
refers to debts maturing before the assignment, hence, here, legal compensation has already
taken place.
Example No. 1:
 A owes B P1,000,000. B owes A P200,000. Both debts are already due. Later, B, with the
knowledge but without the consent or against the will of A, assigned the P1,000,000 credit
to C.
  Here, If A sets up the defense of partial compensation as to previously maturing debts, C
can collect only P800,000. There had already been compensation with respect to the
P200,000.
Example No. 2:
 A owes B P1,000,000 due on April 2; B owes A P200,000 due also on April2. On Feb 4, B
assigned his P1,000,000 credit to C, with the knowledge but without the consent of A.
 Here, On April 2, C can successfully collect from A P1,000,000, because if at all there would
be compensation here, it took place after the assignment not before.
c. Paragraph 3 – Assignment made without the knowledge of the debtor.
Effect: Debtor can set-up compensation as defense for all debts maturing PRIOR to his
knowledge of the assignment
Example:
 A owes B P1,000,000. B owes A in turn P200,000. Both debts are already due. Later, B
assigns his the P1,000,000 credit to C, without the knowledge of A. this assignment was
made on July 1. On July 15, a P250,000 debt of B in favor of A matured. A learned of the
assignment on Aug 1. On Aug 23, A P150,000 debt of B in favor A matures. Later C asks A to
pay his debt.
 Here, C can collect P550,000 because A can set-up the defense of partial compensation
regarding the P200,000 and the P250,000 debts. Debts which had matured PRIOR to his
knowledge and therefore were already compensable.
ARTICLE 1286. Compensation takes place by operation of law, even though the debts may be
payable at different places, but there shall be an indemnity for expenses of exchange or
transportation to the place of payment.
Example: 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 – the conversion of an amount of money or currency of one country into an
equivalent amount of money or currency of another.
ARTICLE 1287. Compensation shall not be proper when one of the debts arises from a
depositum or from the obligations of a depositary or of a bailee in commodatum.
Neither can compensation be set up against a creditor who has a claim for support due by
gratuitous title, without prejudice to the provisions of paragraph 2 of Article 301.
WHEN LEGAL COMPENSATION CANNOT TAKE PLACE
a. When one debt arises from depositum
b. When one debt arises from the obligation of a depositary.
c. When one debt arises from the obligations of a bailee in commodatum
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d. When one debt arises because of a claim for support due to gratuitous title.
Examples:
a. A has a P1,000,000 savings deposit with the Phil. National Bank. One day A borrowed
P200,000 from the Bank. Without asking permission from A, the Bank subtracted the
P200,000 from A’s account, leaving a balance of P800,000 in A’s favor.
Here, compensation is allowed because in this case, the relationship between the
bank and depositor is that of a debtor and creditor.
b. A asked B to keep P1,000,000 for him. Now, A is indebted to B for the amount of
P400,000. When A asks for the return of his money, B gives him only P600,000, alleging
partial compensation.
Here, B is not correct because the P1,000,000 deposit to him is not subject to
compensation.
OBLIGATIONS OF A DEPOSITARY
a. To keep the thing safely and to return it, when required, to the depositor, or to his heirs
and successors, or to the person who may have been designated in the contract.
b. Unless there is a stipulation to the contrary, the depositary cannot deposit the thing with a
third person.
c. If deposit with a third person is allowed, the depositary is liable for the loss if he deposited
the thing with a person who is manifestly careless or unfit.
d. The depositary id responsible for the negligence of his employees.
e. The depositary cannot make use of the thing deposited without the express permission of
the depositor. Otherwise, he shall be liable for damages. However, if the preservation of a
thing requires it use, it must be used but only for that purpose.
ARTICLE 1288. Neither shall there be compensation if one of the debts consists in civil liability
arising from a penal offense.
Reason: if one of the debts consists in civil liability arising from a penal offense, compensation
would be improper and inadvisable because the satisfaction pf such obligation is imperative.
*Criminal cannot claim compensation but the victim may.
*This is another instance of facultative compensation
FACULTATIVE COMPENSATION – where only one side can claim compensation, the other may
not.
ARTICLE 1289. If a person should have against him several debts which are susceptible of
compensation, the rules on the application of payments shall apply to the order of the
compensation.
*APPLICATION OF PAYMENTS- Articles 1252-1254
Art. 1252. He who has various debts of the same kind in favor of one and the same creditor, may
declare at the time of making the payment, to which of them the same must be applied. Unless
the parties so stipulate, or when the application of payment is made by the party for whose
benefit the term has been constituted, application shall not be made as to debts which are not
yet due.
If the debtor accepts from the creditor a receipt in which an application of the payment is made,
the former cannot complain of the same, unless there is a cause for invalidating the contract.
(1172a)

Art. 1253. If the debt produces interest, payment of the principal shall not be deemed to have
been made until the interests have been covered. (1173)

Art. 1254. When the payment cannot be applied in accordance with the preceding rules, or if
application cannot be inferred from other circumstances, the debt which is most onerous to the
debtor, among those due, shall be deemed to have been satisfied.

If the debts due are of the same nature and burden, the payment shall be applied to all of them
proportionately.

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

Automatic compensation if all requisites are present

a. Legal compensation takes place automatically unless there has been valid waiver thereof.
b. Compensation which extinguishes principal obligation also extinguishes accessory
obligations.
c. “To the concurrent amount” means that if one debt is larger than the other, the balance
subsists s debt.