LOSS OF THE THING DUE

Concept of Loss: there is loss when:

a. The thing perishes;
b. Goes out of commerce;
c. When it disappears in such away that its existence is unknown or
cannot be recovered.
This is called “impossibility of performance”.
Kinds of impossibility of performance:
a) Physical impossibility;
b) Legal impossibility;
c) Moral impossibility.
Effects of Loss:
1) If specific or determinate, the obligation is extinguished, except:
a) If the debtor is at fault;
b) When the debtor is liable by provision of law, by contractual
stipulation, or when the nature of the obligation requires the
assumption of risk.
Effects of loss
2. If generic or indeterminate, the obligation is not extinguished under
the principle genus never perishes, except if it is delimited generic
thing.
When there is a limitation of the generic object to a particular existing
mass or a particular group of a thing, the obligation is extinguished by
the loss of a particular mass or group or limited quantity from which
the prestation has to be taken.
Effect of fortuitous event
• The happening of fortuitous event in itself does not necessarily
extinguish an obligation to deliver a determinate thing. The
delivery of a determinate thing shall only be extinguished when
the said object is lost or destroyed without the fault of the
debtor and before he is in default.
Exceptions:
The following cases constitute exceptions to the rule that loss of
the determinate object by fortuitous event extinguishes the
obligation; hence, in these cases, the debtor who is unable to
perform becomes liable for damages
Meaning of
“Obligation is Extinguished”.
• If the thing is specific and it is lost due to fortuitous event, the
“obligation is extinguished”. By this, we mean the obligation to
deliver the same thing is no longer possible because there is no
more thing to deliver. Hence, if there is default on the part of the
debtor, the debtor’s obligation to deliver the same thing is
extinguished but the same is converted into monetary
consideration for damages. The same holds true if the debtor is
at fault- the obligation is converted into its monetary value.
When is partial loss considered as a total loss.
The partial loss of the thing is considered as a total loss, when the
loss is so material and the remaining portion of the object is
insignificant or immaterial.

Presumption of loss
The law presumes that the debtor is at fault, except incase of
natural calamity.
Example of impossibility
a. Legal- delivery of an object declared illegal by the law after the
constitution of the obligation.
b. Physical- to repair the hull of a vessel lost in her voyage after
the perfection of the contract.
“Beyond Contemplation Rule” and its
requisites
The impracticability of performance or the performance is
impossible due to change of condition after the obligation was
constituted and this was not contemplated by the parties.
Requisites to concur.
a. The service must become so difficult and that it was manifestly
beyond the contemplation of the parties.
b. One of the parties must ask for relief
c. It must refer to future service with unusual change in the
condition of performance.
Decided cases of moral possibility and
impossibility
a. Construction of railroad when it becomes dangerous to life and
property, debtor is released.
b. Increase in apartment rentals is not beyond contemplation, but
sometimes it may be unreasonable, debtor is not released but
he must pay only reasonable increase.
c. Existence of mere inconvenience is moral possibility, obligor is
not released.
d. The difficulty of the construction of a bridge above or on top of
the railroad could not possibly have been anticipated or
foreseen.
Effect of loss in criminal offense
If the thing proceeds from a criminal offense, the loss of such thing
shall not extinguish the obligation unless the creditor is in default.
Right of subrogation
If the thing which the debtor promised to deliver got lost, and such
loss is imputable to a third person (not the debtor), the right of the
debtor against such person are transferred to the creditor under
the rule on subrogation.
 SECTION 3
CONDONATION OR
REMISSION OF DEBT
Remission or condonation defined
It is the gratuitous abandonment by the creditor of his right.

Essential requisites of remission

a. There must be an agreement.
b. The parties must be capacitated.
c. There must be a subject matter.
d. The cause or consideration is generosity.
e. Obligation is demandable at the time of remission.
f. Remission must not be inofficious
Classes of Remission
a. As to effect or extent
1. Total
2. Partial
b. Date of effectivity
1. Inter vivos- lifetime
2. Mortis causa- after death
c. As to form
1. Implied or tacit
2. Express or formal
Requisites of condonation
a) Express remission must comply with the formalities of condonation:
(1) if the condonation is implied, condonation need not comply
with the formalities of donation;
b) Remission that takes effect upon the death of the creditor may be
stated in a last will and testament or a donation mortis causa which
must comply with the formalities of a last will and testament;
c) Remission can also be implied, in which case, no formalities are
required.
Effect of delivery to the debtor of
private instrument evidencing the
credit.
a. There was voluntary delivery.
b. Purpose is to extinguish the obligation.

Presumption is rebuttable
The presumption of voluntary delivery and
renunciation of the obligation is disputable, such
that if the creditor can introduce or present
evidence to the contrary the presumption will be
defeated.
Plurality of subjects
a. If the obligation is joint and the private instrument is found in
the possession of one of the debtors, only the share of the
debtor who is in possession is deemed impliedly renounced or
remitted or condoned.
b. If the obligation is solidary, the whole obligation is deemed
impliedly remitted or condoned.
Effect of the renunciation of the principal
and/or accessory obligation
If the principal obligation is remitted or renounced, the accessory
will follow, but if it is the accessory which is remitted or
renounced, the principal shall subsist.
Effect of delivery of the thing pledged to the
debtor by the creditor
Contract of pledge is extinguished but not the principal obligation.
Debtor is still indebted but there is no more security.
 SECTION 4
CONFUSION OR MERGER OF
RIGHTS
Confusion or merger defined
It is the meeting in one person of the qualities of creditor and
debtor with respect to the same obligation.
Requisites for a valid merger:
a. It must take place between the principal debtor and creditor.
b. The merger must be clear and definite.
c. Obligations are the same or identical.
Effect of merger and confusion
a. Obligation is extinguished.
b. If there is a guarantor and the merger is in the principal debtor,
the obligation is extinguished, the guarantor is released.
“Accessory follows the principal”
c. If there is a guarantor, and the merger is not on the principal
debtor but only on the guarantor, the principal obligation is not
extinguished but the accessory is extinguished.
Confusion in joint and solidary obligation
a. If the obligation is joint, only the share corresponding to the
creditor or debtor in whom the two characters concur.
b. If the obligation is solidary, the obligation is totally
extinguished.
 SECTION 5
COMPENSATION
Compensation defined
It is the extinguishment to the concurrent amount of the debts of
two persons who, in their own rights are debtors and creditors of
each other. Manresa defines compensation as a sort of balancing
two obligations simultaneously or to extinguish them to the extent
in which the amount of one is covered by the other.
This compensation is sometimes called abbreviated or simplified
payment, because the two debts are extinguished without the
transfer of money or property from one party to the other.
Compensation distinguished from payment
a. In compensation, partial payment is always permitted, while in
payment, it must be complete and indivisible as a rule.
b. In compensation, the mode may take place by operation of law;
while in payment, it involves action or delivery of the amount paid.
Compensation distinguished from merger
a. In compensation, there must be two persons who are mutually
creditor and debtor to each other; while in merger or
confusion, there is only one person in whom is merged the
qualities of creditor and debtor.
b. In compensation, there must be two persons involved; while in
confusion, there can be only one person.
Distinguish a set-off or counterclaim from
compensation
A set-off or counterclaim must be pleaded to be effectual whereas
compensation takes place by mere operation of law and
extinguishes the two debts reciprocally.
What are the kinds of compensation?
a. As to their effects:
1. Total- same amount
2. Partial- not equal
b. As to origin:
1. Legal- by operation of law
2. Facultative- one party can claim compensation, the other cannot
3. Conventional- by agreement of the parties
4. Judicial- decreed by the court, in case where there is counterclaim
Concept of facultative compensation
This is compensation which can be set up only at the option of a
creditor, when legal compensation cannot take place because one
or some elements are missing. While this creditor can oppose
compensation, he renounces it, but he himself can compensate.
Legal compensation or operation of law
The requisites mentioned apply to compensation by operation of
law. Even if there is no agreement voluntarily and validly entered
into, there is compensation by operation of law.
Requisites of legal compensation exemplified
a. That both the obligors be bound principally, and that they be at
the same time a principal creditor of the other.
b. 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.
c. That the two debts are due.
d. That they be liquidated and demandable.
Guarantor may set up compensation with
respect to principal debt.
Total or partial compensation
When the debts are of the same amount there is total
compensation. If not of the same amount, there is partial
compensation.

Conventional or voluntary compensation

Debts which are not due or demandable cannot be compensated,
but the parties may compensate them voluntarily and this is called
conventional or voluntary compensation.
Judicial compensation or set-off
In judicial compensation or set-off, the parties must prove his right
on the damages claimed at the time of pleading. The claim must
be unliquidated because the fixing or liquidation must be made in
the proceeding itself.
Rescissible or voidable debts can be
compensated
In a contract were the debts are Rescissible or voidable the same
may be compensated, provided they are not yet declared
rescinded or void, because Rescissible and voidable debts are valid
and binding until cancelled or declared void.
Assignment of the creditor’s right
a. With the consent of the debtor
The debtor who has consented to the assignment of the creditor’s
right to a third person, cannot set up against the assignee the
compensation which pertains to him against the assignor, unless
he reserved his right to compensate.
b. With notice from the creditor but without the debtor’s consent
The debtor can set up against the assignee the compensation of
debts previous to the cession, but not of subsequent ones.
Automatic compensation
When the requisites as stated in Article 1729 are present, there is
automatic compensation even if the two debts are payable at
different places. However, there shall be an indemnity for
expenses of exchange of transportation to the place of payment.
Reasons for the prohibition
Contract of deposit and commodatum are based on confidence
and trust. It is but natural that the depository (in contract of
deposit) and the borrower (in commodatum) must perform their
obligation, otherwise, the trust or confidence of the deposit or
lender would be violated.
Future support cannot also be compensated because this is given
for the benefit of the recipient. Otherwise he will be exposed to
misery and starvation. Support in arrears, however, can be
compensated
When legal compensation cannot take place:
1. When one debt arises from a depositum in a contract of
deposit (not in bank deposit, for this is really a loan)
2. When one debt arises from the obligation of a bailee in
commodatum.
3. When one debt arises because of a claim for support.
4. When one of the debts consists in civil liability arising from
criminal offense.
Note: In No. 1, the relation of a depositor with a bank is
considered debtor-creditor relation, so the bank may set up
compensation.
SECTION 6
NOVATION
Art. 1291. Obligations may be modified by:
(1) Changing their object or principal conditions;
(2) Substitution the person of the debtor;
(3) Subrogating a third person in the rights of the creditor

Novation defined
It is the extinction of an obligation through the creation of a new
one which substitutes the old one.
Dual purpose of Novation
a. Original obligation is extinguished.
b. A new obligation is created.

Requisites of Novation:
a. Previous valid obligation.
b. Capacity and intention of the parties to modify or extinguish the
obligation.
c. The modification or extinguishment of the obligation.
d. The creation of a new, valid obligation.
Kinds of Novation
1. As to form
a. express- declared in an unequivocal term.
b. Implied-both obligations are incompatible with each other.
2. As to object or purpose
a. Personal or subjective- person of the debtor is substituted or
the rights of the creditor is subrogated.
b. Real or objective- change of the object or principal condition.
c. Mixed- change of the parties and object or principal condition.
Substantial changes considered an implied
novation
a) Changing the object or subject matter of the contract.
b) Changing the cause or consideration.
c) Changing the principal terms and condition.
Cases when the court held that there was no
novation
a) When there are only slight alterations or modification in the
construction plans of building.
b) When the new contract merely contains supplementary
agreement.
c) When additional interest is agreed upon.
d) When additional security is given.
e) When guarantor enters into an agreement with the creditor
that he will also be a principal debtor. The court said, no
novation, original debtor still liable.
Changes in period or term or time of payment
a) If time of payment is shortened, say from 10 to 5 years, there is
novation, because the two obligations are incompatible with
one another.
b) If the payment is extended, say from 5 years to 10 years, there
is no novation, because the two obligations are compatible to
one another, they can stand together. There is no essential
change or alteration of the principal term of the original
contract.
In another case, the court said that mere extension of the term of
payment does not result in novation, for the period affects only
the performance. Not the creation of the obligation.
Changes in contract of guaranty
Any extension mode granting the debtor an extension of time
without the consent of the guarantor shall only extinguish the
contract of guaranty, and not the principal obligation to pay. In like
manner when the same period is shortened, the guarantor cannot
be compelled to pay before the expiration of the original period to
which they bound themselves.
Kinds of substitution of the debtor
a. Expromision
b. Delegacion

Expromision defined and exemplified

That which takes place when a third person on his own initiative
and without the knowledge or against the will of the original
debtor assumes the obligation.
Delegacion defined and exemplified
One which takes place when the creditor accepts a third persons
to take the place of the debtor at the instance of the latter.
The insolvency of the new debtor, who has been proposed by the
original debtor and accepted by the creditor, shall not revive the
action of the latter against the original obligor, except when said
insolvency was already existing and of public knowledge, or known
to the debtor, when he delegated his debt.
Requisites of expromision and delegacion
a. Expromision
1. Initiative of payment comes from the third person.
2. The consent of the creditor and new debtor is required.
3. The obligation of the old debtor is absolutely extinguished.
b. Delegacion
1. Initiative of payment comes from the debtor.
2. The original debtor, the creditor and the third person, or the
new debtor must consent.
3. The obligation of the old debtor is generally extinguished.
Effects of Novation on accessory obligation:
If the principal obligation is extinguished by novation, the
accessory obligation shall subsist only insofar as they may benefit
third persons who did not give their consent.
Effect of novation in void obligation
If the original obligation is void, the novating contract is also void.
If the novating contract is the one which is void, the original one
shall subsist.

Effect of novation if old obligation is voidable

If the original is voidable only, a valid novation can take place
because voidable contracts are valid until annulled by proper
action in court.
Effect if the new obligation is voidable
If the new obligation is voidable, not void, the old one is
extinguished and the new one shall be given force and effect until
it is annulled. Take note that voidable contracts are subject to
ratification to give them a lasting effect.
Effect if the original obligation is subject to a
condition
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.
Subrogation defined
Manresa defines subrogation as the transfer to a third person of all
the rights appertaining to the creditor, including the right to
proceed against the guarantor, possessor of mortgages, subject to
any legal provision or any modification that may be agreed upon.
Subrogating a third person in the rights of the
creditor may be:
a. Conventional subrogation taking place by the agreement of the
original creditor, the third person substituting the original
creditor, and the debtor.
b. Legal subrogation- taking place by operation of law. Legal
subrogation cannot be presumed, except in cases provided by
law.
When it is presumed that there is legal
subrogation?
a. When a creditor pays another creditor who is preferred even if
without the debtor’s knowledge.
b. When a third person not interested in the obligation pays with
the express or tacit approval of the debtor.
c. 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.
What are the effects of subrogation?
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 stipulation in a conventional subrogation.

Subrogation in case partial payment is made

As between the creditor and the third person who may have been
partially subrogated in the rights of the creditor, it is still the first
creditor who is preferred.