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OBLICON- Chapter
4

Fundamentals of Accountancy, Business, and Management (National College

of Business and Arts)

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CH A P TE R 4 – EXTINGUISHMENT OF OBLIGATIONS

1) Major c a u s e s of ex t ingui s hm e nt of obligation

· B y p a y m e n t or performance

· B y loss of the thing d u e

· B y condonation or remission of debt

· B y confusion or merger of rights of creditor a n d debtor

· B y compensation

· B y novation

2) Other c a u s e s of ext ingui s hme n t of obligation

· D e at h of a party in c a s e the obligation is a personal one

· Mutual de s is t a nc e or withdrawal

· Arrival of a resolutory period

· Compromise

· Impossibility of performance

· H a p p e n i n g of a fortuitous eve nt

3) Article 1 2 3 2 . Paym en t m e a n s not only the delivery of m o n e y but also the

performance, in a n y other m ann e r , of a n obligation. P ayme n t a n d performance are
s yn o ny m o us in law.

4) Debt – m a y refer to a n obligation to deliver m o ne y, to deliver a thing, to do a n act,

or not to do a n act.

5) Ge neral Rule: Article 1 2 3 3 . A debt s hall not b e understood to h a v e b e e n pai d

u nl e s s the thing or se rvice in which the obligation consists h a s b e e n completely
delivered or rendered, a s the c a s e m a y be .

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Exception to the gener al rule:

a ) Article 1 2 3 4 . If the obligation h a s b e e n substantially performed in good faith, the
obligor m a y recover a s though there h a d b e e n a strict a n d complete fulfillment, l e s s
d a m a g e s suffered b y the obligee.
b) Article 1 2 3 5 . When the obligee a c c e p t s the performance, knowing its incom plet ene ss
or irregularity, a n d without e xp r e s s i n g a n y protest or objection, the obligation is d e e m e d
fully complied with.

6) Re qui s ites for the application of Art. 12 3 4 / substantial performance

· Th ere m u s t b e a substantial performance

· T h e obligor m u s t b e in good faith

7) Re qui s ites for the application of Art. 12 3 5 / incomplete a n d irregular performance

· T h e obligee knows that the performance is incomplete or irregular

· H e ac c e p t s the performance without e x p r e s s i n g a n y protest or objection

8) Ge neral Rule: Article 1 2 3 6 . T h e creditor is not bound to ac ce p t p a y m e n t or

performance b y a third person who h a s no interest in the fulfillment of the obligation.

Exception: Unless there is a stipulation to the contrary

Ge neral Rule: Se c o nd par ag raph of Article 1 2 3 6 . Whoever p a y s for another m a y d e m a n d

from the debtor what h e h a s paid.

Exception: E x c e p t if h e pa id without the knowledge or a ga i ns t the will of the debtor, h e

c a n recover only insofar a s the p a y m e n t h a s b e e n beneficial to the debtor.

9) Persons from whom the creditor m u s t ac c e pt p a y m e n t

· T h e debtor

· Any person who h a s a n interest in the obligation (like a guarantor)

· A third person who h a s no interest in the obligation when there is stipulation that
he can ma ke payment

10) Effect of p a y m e n t b y third person

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· If m a d e without the knowledge or a gai n s t the will of debtor – the pa ye r c a n only

recover from the debtor the amount which h a s b e e n beneficial to the latt er.

· If m a d e with the knowledge a n d consent of the debtor – the pa ye r h a s the right to

reimbursement for the whole amount that h a s b e e n pa i d a n d subrogation of rights of
creditor.

1 1 ) Ge neral Rule : Article 1 2 3 7 . Whoever p a y s on behalf of the debtor without the

knowledge or a ga i n s t the will of the latt er, cannot com pel the creditor to subrogate hi m
in his rights, s u c h a s those arising from a mortgage, gu aran ty, or penalty.

Excep tions to the gene ral rule: Article 1 3 0 2 . L e g a l subrogation b y operation of law is
p r e s u m e d in certain c a s e s .

1 2 ) Re i m b u r s e m e nt – the third person entitled b y reason of p a y m e n t h a s mer el y the

bare right to b e refunded to the extent provided in the s e c ond pa ragr aph of Article 1 2 3 6
without the right to the gu a ran t ee s a n d securities of the original obligation.

1 3 ) Subrogation – there is no real extinction of the obligation, but only a c h a n g e of

creditor.

1 4 ) Article 1 2 3 8 . Paym en t m a d e b y a third person who does not intend to b e

reimbursed b y the debtor is d e e m e d to b e a donation, which requires the debtor’s
consent. But the p a y m e n t is in a n y c a s e valid a s to the creditor who h a s a c c e p t e d it.

1 5 ) Ge neral Rule : Article 1 2 3 9 . In obligations to g i v e , p a y m e n t m a d e b y one who does

not h a v e the free disposal of the thing d u e a n d c a pac i t y to alienate it s hall not b e valid.
Exception to the ge ne ral rule: Article 1 4 2 7 . When a minor entered into a contract without
the consent of the parent or gua rdia n, voluntarily p a y s a s u m of m o n e y or delivers a
fungible thing in fulfillment of the obligation, there shall b e no right to recover the s a m e
from the obligee who h a s spe nt or c o n s u m e d it in good faith.

1 6 ) Free disposal of the thing d u e – m e a n s that the thing to b e delivered m us t not b e

subject to a n y c l a i m or lien or e n c u m b r a n c e of a third person.

1 7 ) C a p a c i t y to alienate – m e a n s that the person is not incapacitated to enter into

contracts a n d for that matt er, to m a k e a disposition of the thing due .

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18) Person to whom p a y m e n t shall b e m a d e

· T h e creditor or obligee ( H e m u s t b e the creditor at the time the p a y m e n t is to b e

m a d e not at the constitution of the obligation. H e n c e , if a person is subrogated to the
right of the creditor, p a y m e n t should b e m a d e to the new creditor.)

· H is success or in interest

· Any person authorized to recei ve it

19) Any person authorized to recei ve p a y m e n t

· G ua rdi a n of a ward

· Administrator of executor of the estate of a d e c e a s e d

· Liquidator of a partnership/corporation

· Persons authorized b y sp e c i a l power of att orney

· Third person provided that the p a y m e n t benefits the creditor

2 0 ) Ward – minor person or person of a g e but h a s a me n tal disposition of that a s a

minor.

2 1 ) Ge neral Rule : Article 1 2 4 1 . P aym ent to a person incapacitated to admini ster or

m a n a g e his property is not valid.
E xc e p t :
a ) T h e incapacitated person kept the thing p a id or delivered.
b) Or h e was benefited b y the p a y m e n t

2 2 ) Ge neral Rule : Article 1 2 4 1 . P aym ent to a third person is not valid.

Exception: T h e p a y m e n t h a s b e e n redounded to the benefit of the creditor a n d p a y m e n t
m a d e in good faith ( p r e su m e d ) to a n y person in possession of the credit. (Art. 1 2 4 2 )

2 3 ) Ge neral Rule : Article 1 2 4 1 . It is not p r e s u m e d a n d therefore m u s t b e proven that

the creditor was benefited b y the pa y m e n t m a d e to a third person.
Exception: When benefit to creditor n e e d not b e proved b y debtor
a ) Subrogation of the pa ye r in the creditor’s right

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b) Ratification b y the creditor

c ) Estoppel on the part of the creditor

2 4 ) Estoppel – a n adm is s ion or representation is rendered conclusive upon the person

m a k i n g it a n d cannot b e de ni e d or disproved a s ag a i n s t the person relying thereon.

2 5 ) Ratification – process of c l e a ns i n g the defect in a contract b y ackn owle d ging its

validity despite its defects. Re c o gn i z i n g a person’s authority despite the a b s e n c e of it.

2 6 ) Article 1 2 4 3 . Paym en t m a d e to the creditor b y the debtor after the latt er h a s b e e n

judicially ordered to retain the debt shall not b e valid.

2 7 ) Ge neral Rule : Article 1 2 4 4 . T h e debtor of a thing cannot compel the creditor to

receive a diff erent one, although the latt er m a y b e of the s a m e v a l u e a s , or more
va l u a bl e than that which is due . In obligation to do or not to do, a n act or forbearance
cannot b e substituted b y another act or forbearance ag a i n s t the obligee’s will.
Exception: Substitution c a n b e m a d e if the obligee consents, for e x a m p l e in facultative
obligations. Article 1 2 4 4 will not also ap pl y in c a s e of waiver b y the creditor or
substitution is allowed b y stipulation with the consent of the creditor.

2 8 ) Article 1 2 4 5 . Dation in pa y m e n t , whereby property is alienated to the creditor in

satisfaction of a debt in m o ne y, shall b e governe d b y the law of s a l es .

29) S pe c i a l forms of pa y m e n t

· Dation in p a y m e n t

· Application of pa y m e n t s (stictly s p e a k i n g , it is not a sp e c i a l form of pa y m e n t )

· P ayme n t b y cession

· Tende r of p a y m e n t a n d consignation

3 0 ) Dation in p a y m e n t (adjudication or dacion e n pag o) – is the c o n v e y a n c e of

ownership of a thing a s a n ac c e p t e d equivalent of performance. An exis ting debt in
m o n e y is satisfied, not b y p a y m e n t of m o n e y but b y the alienation of property.

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3 1 ) Ge neral Rule : Article 1 2 4 6 . (Rul e of m e d i u m quality a n d a principle of equity) When

the obligation consists in the delivery of a n indeterminate or generic thing, whose quality
a n d c i r c um s t an c es h a v e not b e e n stated, the creditor cannot d e m a n d a thing of superior
quality. Neither c a n the debtor deliver a thing of inferior quality. T h e purpose of the
obligation a n d other ci r c um s t a nce s shall b e tak en into consideration.
Exception: T h e benefit of this article m a y b e waived b y the creditor or b y ac c e p t i n g a
thing of inferior quality, a n d b y the debtor b y delivering a thing of superior quality.

3 2 ) Ge neral Rule : Article 1 2 4 7 . Extrajudicial e x p e n s e s required b y the p a y m e n t s hall b e

for the account of the debtor.
Exception: Unless it is otherwise stipulated, stipulation of the parties m u s t b e followed.
Thi s article does not a p p l y to e x p e n s e s incurred b y the creditor in going to the debtor’s
domicile to collect.

3 3 ) Judicial costs – are the statutory amounts allowed to a party to a n action for his
e x p e n s e s incurred in the action. T h e costs of a n action shall, a s a rule b e pa id b y the
losing party. T h e court m a y , however, for s pe c ia l reasons, a dj u dg e that either party shall
p a y the costs or that the s a m e b e divide d a s m a y b e equitable.

3 4 ) Ge neral Rule : Article 1 2 4 8 . T h e creditor cannot b e compell ed partially to receive

the prestations in which the obligation consists. Neither m a y the debtor b e required to
m a k e partial p a y m e n t s .
Exceptions: When partial performance is allowed
a ) when there is a n e xp r e s s stipulation to that eff ect
b) when the debt is in part liquidated a n d in part unliquidated
c ) when the different prestations in which the obligation consists are subject to different
terms or conditions which affect s o me of them.

3 5 ) L e g a l Tende r – is that currency which a debtor c a n le gal l y c ompel a creditor to

ac c e p t in p a y m e n t of a debt in m o n e y when tendered b y the debtor in the right amount.

3 6 ) Ge neral Rule : Article 1 2 5 0 . In c a s e a n extraordinary inflation or deflation of the

currency stipulated should s upe r ve ne, the v a l u e of the currency at the time of the
es tabli shmen t of the obligation shall b e the b a s i s of pa y m e n t .
E xc e p t : Unless there is a n a g r e e m e n t to the contrary.

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3 7 ) Inflation – is a sharp s u d d e n inc re ase of m o n e y or credit or both without a

corresponding i ncr eas e in b u s i n e s s transactions. It c a u s e s a drop in the v a l u e of m o ne y,
resulting in the rise of the ge n e ral price level.

3 8 ) Deflation – is the reduction in volum e a n d circulation of the avai l abl e m o n e y or

credit, resulting in a decli ne of the ge n e ral price level; it is the opposite of inflation.

39) Place where obligation s hall b e p a id

· If there is a stipulation, the p a y m e n t shall b e m a d e in the pl a c e de s i gn a t e d.

· If there is no stipulation a n d the thing to b e delivered is specific, the p a y m e n t shall

b e m a d e at the pl a c e where the thing was, at the perfection of the contract.

· If there is no stipulation a n d the thing to b e delivered is gene ric, the pl a c e of

p a y m e n t shall b e the domicile of the debtor. In this c a s e , the creditor bea rs the e x p e n s e s
in going to the debtor’s pl a c e to ac ce p t pa ym e n t .

40) V e n u e – is the pl a c e where a court suit or action m u s t b e filed or instituted.

4 1 ) Domicile – is the pl ac e of a person’s habitual res idenc e; the pl ac e where h e h a s his

true fixed perma ne nt ho me a n d to which pl a c e he, whenever h e is ab se nt , h a s the
intention of returning.

4 2 ) R e s i d e n c e – is only a n e le m e n t of domicile. It s i m pl y requires bodily pr ese nc e a s a n

inhabitant in a g i v e n pl a ce .

4 3 ) Ge neral Rule : Article 1 2 5 2 . Application of p a y m e n t shall not b e m a d e a s to debts

which are not yet due .
E xc e p t : T h e parties so stipulate or when the application of p a y m e n t is m a d e b y the party
for whose benefit the term h a s b e e n constituted.

4 4 ) Ge neral Rule : Article 1 2 5 2 . If the debtor a c c e p t s from the creditor a receipt in which
a n application of the p a y m e n t is m a d e , the former cannot com plain of the s a m e .
E xc e p t : There is a c a u s e for invalidating the contract.

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4 5 ) Application of p a y m e n t s – is the designation of the debt to which should b e applie d

the p a y m e n t m a d e b y a debtor who h a s various debts of the s a m e kind in favor of one
a n d the s a m e creditor.

46) Re qui s ites for application of p a y m e n t s

· Th ere m u s t b e one debtor a n d one creditor

· Th ere m u s t b e two or more debts

· T h e debts m u s t b e of the s a m e kind

· T h e debts to which the p a y m e n t h a s b e e n applie d m u s t b e d u e

· T h e p a y m e n t m a d e m u s t not b e s u fi c i e n t to cover all the debts

47) R u l e s on application of p a y m e n t s

· T h e debtor h a s the first choice; h e m u s t indicate at the time of m a k i n g p ay m e n t ,

a n d not afterwards, which particular debt is b e i n g paid. If, in m a k i n g u s e of his right, the
debtor applied the p a y m e n t to a debt, h e cannot later c la i m that it should b e a ppli ed to
another debt. T h e right to m a k e the application once e xe r c i se d is irrevocable u nl e s s the
creditor consents to the c h a n g e .

· If the debtor does not a p p l y pa y m e n t , the creditor m a y m a k e the designation b y

s pe ci fyi ng in the receipt which debt is b e i n g paid. T h e debtor m u s t consent to this.

· If the creditor h a s not also m a d e the application, or if the application is not valid,
the debt, which is most onerous to the debtor a m o n g those du e , shall b e d e e m e d to
h a v e b e e n satisfied.

· If the d ebts d u e are of the s a m e nature a n d burden, the p a y m e n t s hall b e applie d

to all of t h e m proportionately.

4 8 ) Ge neral Rule : Article 1 2 5 3 . If the debt produces interest, p a y m e n t of the principal

shall not b e d e e m e d to h a v e b e e n m a d e until the interests h a v e b e e n covered.
Exception: T h e rule is subject, however, to a n y ag r e e m e n t between the parties, or to
waiver b y the creditor.

49) R u l e s to onerosity

· An interest-bearing debt is more onerous than a non-interest be aring debt e v e n if

the latt er is a n older one.

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· A debt a s a sole debtor is more onerous than a s a solidary debtor.

· D e b t s s e c u r e d b y a mortga ge or b y pl e d g e are more onerous than un s e c u r e d

debts.

· Of two interest be aring debts, the one with a higher rate is more onerous.

· An obligation with a penalt y c l a u s e is more bu rden s ome than one without pena lty
clause.

5 0 ) Ge neral Rule : Article 1 2 5 5 . P aym ent b y cession shall only rele ase the debtor from
responsibility for the net proceeds of the thing a s s i g n e d .
Exception: Unless there is a stipulation to the contrary.

5 1 ) Payme nt b y cess ion – is another spe ci al form of p a ym e n t . It is the a s s i g n m e n t or

ab a nd onme n t of all the properties of the debtor for the benefit of his creditors in order
that the latt er m a y sell the s a m e a n d a p p l y the proceeds thereof to the satisfaction of
their credits.

52) Re qui s ites of p a y m e n t b y cess ion

· Th ere m u s t b e two or more creditors

· T h e debtor m u s t b e insolvent

· T h e cess ion m us t b e a c c e p t e d b y the creditors

53) Dation in p a y m e n t a n d cess ion dis tinguishe d

· In dation, there is us ual l y only one creditor, while in cession, there are se ve ral
creditors.

· Dation does not presuppose the ins olvenc y of the debtor, while in cession, the
debtor is insolvent at the time of a s s i g n m e n t .

· Dation does not involve all the property of the debtor, while cession e x t e n d s to all
the property of the debtor subject to execution.

· In dation, the creditor b e c o m e s the owner of the thing g i v e n b y the debtor, while
in cession, the creditors only acquire the right to sell the thing a n d a pp l y the proceeds to
their credits proportionately.

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5 4 ) Article 1 2 5 6 . If the creditor to whom tender of p a y m e n t h a s b e e n refused without

just c a u s e to ac c e p t it, the debtor shall b e release d from responsibility b y the
consignation of the thing or s u m due .
Consignation alone shall produce the s a m e effect in the following c a s e s :
a ) When the creditor is abse n t or unknown, or does not app ea r at the pl ac e of p a y m e n t
b) When h e is incapacitated to recei ve the p a y m e n t at the time it is d u e
c ) When, without just c a u s e , h e refuses to g i v e a receipt
d) When two or more persons c l ai m the s a m e right to collect
e ) When the title of the obligation h a s b e e n lost

5 5 ) Tende r of p a y m e n t – is the act, on the part of the debtor, of off ering to the creditor
the thing or amount du e . T h e debtor m us t show that h e h a s in his possession the thing
or m o n e y to b e delivered at the time of the offer.

5 6 ) Consignation – is the act of depositing the thing or amount d u e with the proper
court when the creditor does not desire or cannot receive it, after c om pl yi ng with the
formalities required b y law. It is a lways judicial a n d it general l y requires a prior tender of
p a y m e n t which is b y its ve ry nature extrajudicial.

57) Re qui s ites of a valid consignation

· E xi s t e n c e of a valid debt which is d u e

· Tende r of p a y m e n t b y the debtor a n d refusal without justifiable reason b y the

creditor to ac c e pt it

· Previous notice of consignation to persons interested in the fulfillment of the

obligation

· Consignation of the thing or s u m d u e

· S ub s e q u e n t notice of consignation m a d e to the interested parties

58) Re qui s ites for valid tender of p a y m e n t

· Tende r of p a y m e n t m u s t co m pl y with the rules on p a y m e n t (Art. 1 2 5 6 - 1 2 5 8 ) . T h e

tender, e v e n if valid, does not b y itself produce le g al pa y m e n t , unl e s s it is completed b y
consignation.

· It m u s t b e unconditional a n d for the whole amount.

· It m u s t b e actually m a d e .

5 9 ) Article 1 2 5 9 . T h e e x p e n s e s of consignation, when properly m a d e , shall b e c h a r g e d

agai n s t the creditor.

60) When consignation d e e m e d properly m a d e

· When the creditor ac c e p t s the thing or s u m deposited, without objection, a s

p a y m e n t of the obligation

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· When the creditor questions the validity of the consignation, a n d the court, after
he aring, decla res that it h a s b e e n properly m a d e

· When the creditor neither a c c e p t s nor questions the validity of the consignation,
a n d the court after hearing, orders the cancellation of the obligation

61) T h e debtor m a y withdraw a s a matt er of right the thing or s u m deposited

· Before the creditor h a s ac c e p t e d the consignation

· Before a judicial declaration that the consignation h a s b e e n properly m a d e , a s h e

is still the owner of the s a m e . In s u c h a c a s e , the obligation shall continue to rem ain in
force. All e x p e n s e s are pai d b y the debtor.

6 2 ) Article 1 2 6 1 . If, the consignation h a v i n g b e e n m a d e , the creditor should authorize

the debtor to withdraw the s a m e , h e shall lose eve ry preference which h e m a y h a v e over
the thing. T h e co-debtors, guarantors a n d sureties s hall b e release d.

6 3 ) T h i n g is Lost – when it perishes, or g oe s out of c o m m e r c e or di s a ppe a r s in s u c h a

way that its e xi s t e nc e is unknown or it cannot b e recovered.

6 4 ) Los s of a determinate thing is equivalent to impossibility of performance in

obligations to do.

65) Re qui s ites for loss of the thing in obligation to g i v e

· T h e obligation is to deliver a s pecific thing

· T h e loss of the thing occurs without the fault of the debtor

· T h e debtor is not guilty of d e la y

66)(Excep tion to the Gene ral R ul e that impossibility of performance or loss of the thing
d u e rel e as es the obligor) When loss of the thing will not ex t ingui sh liability

· When the law so provides

· When the stipulation so provides

· When the nature of obligation requires the assump tion of risk

· When the obligation to deliver a speci fic arises from a crime

6 7 ) Art. 1 2 6 3 . In a n obligation to deliver a generic thing, the loss or destruction of

any t hi ng of the s a m e kind does not e xt i ngui sh the obligation. It is b a s e d on the principle
that a ge ne ric thing neve r perishes ( g e n u s n u n q u a m perit).

6 8 ) Partial Lo ss – only a portion of the thing is lost or destroyed or when it suffers

depreciation or deterioration. It is equivalen t of di fi c ul t y of performance in obligations to
do.

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6 9 ) Art. 1 2 6 4 . T h e court shall determine whether, under the ci rc um s t a nc es , the partial

loss of the object of the obligation is so important a s to ex t ingui sh the obligation.

7 0 ) Ge neral Rule : Article 1 2 6 5 . Whenever the thing is lost in the possession of the
debtor, it s hall b e p r e s u m e d that the loss was d u e to his fault.
Exception: Unless there is proof to the contrary, a n d without prejudice to the provisions
of article 1 1 6 5 . Thi s presumption does not a p pl y in c a s e of earthquake, flood, storm or
other natural ca lami ty.

7 1 ) Article 1 2 6 6 . T h e debtor in obligations to do shall also b e release d when the

prestation b e c o m e s lega l l y or physi c a l l y impossible WITHOUT T H E FAULT OF T H E
OBLIGOR.

72) K i n ds of Impossibility (Article 1 2 6 6 refers to personal obligations)

· Physical Impossibility

· L e g a l Impossibility

· Rel ative Impossibility

7 3 ) Physical Impossibility – in purely personal obligations, when the personal

qualifications of the obligor are involved, this t a k es pl a c e , when, for e x a m p l e , the obligor
di e s or b e c o m e s phys i c a l l y incapacitated to perform the obligation.

7 4 ) L e g a l Impossibility – occurs when the obligation cannot b e performed b e c a u s e it is

rendered impossible b y provision of law, although physi c al l y it m a y b e possible of
performance.

7 5 ) Rel ative Impossibility – article 1 2 6 7 talks about this. When the s ervi ce h a s be c o m e
so di fi c ul t a s to b e manifestly bey ond the contemplation of the parties, the obligor m a y
also b e rele as e d therefrom, in whole or in part.

7 6 ) Ge neral Rule : Article 1 2 6 8 . When the debt of a thing certain a n d determinate

proceeds from a criminal off ense, the debtor s hall not b e e x e m p t e d from the p a y m e n t of
its price, whatever m a y b e the c a u s e for the loss.
Exception: Unless the thing h a v i n g b e e n offered b y hi m to the person who should rece ive
it, the latt er refused without justification to ac c e p t it. (Creditor is in mora accipi endi)

7 7 ) Article 1 2 6 9 . T h e obligation h a v i n g b e e n ex t i n gu i s he d b y the loss of the thing, the

creditor shall h a v e all the rights of action which the debtor m a y h a v e a g a i n s t third
persons b y reason of the loss.

7 8 ) Condonation or remission – is the gratuitous ab a nd onm e n t b y the creditor of his

right agai ns t the debtor. It is thus a form of donation.

79) Re qui s ites of condonation or remission

· It m u s t b e gratuitous

· It m u s t b e a c c e p t e d b y the obligor

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· T h e parties m us t h a v e c a pac i t y

· It m u s t not b e ino fi c i ous

· If m a d e e xp r essl y, it m u s t c om pl y with the forms of donations

80) K i n ds of Re mis s i on

As to its extent

· Complete – when it covers the entire obligation

· Partial – when it does not cover the entire obligation

As to its form

· E x p r e s s – when it is m a d e either verbally or in writing

· Implied – when it c a n only b e inferred from conduct

As to its date of eff ectivity

· Inter vivos – when it will take effect during the lifetime of the donor

· Mortis c a u s a – when it will be c o m e effective upon the death of the donor. It m u s t

c om pl y with the formalities of a will

8 1 ) Le gi t im e – is that part of the testator’s property which h e cannot dispose of

b e c a u s e the law h a s reserved it from certain heirs who are, therefore, ca lled
COMPULSARY H E I R S .

8 2 ) Article 1 2 7 1 . T h e delivery of a private doc ume nt e vi d e n c i n g a credit m a d e

voluntarily b y the creditor to the debtor, impli es the renunciation of the action which the
former h a d a ga in s t the latt er. It c a n b e nullified, however, b y showing that the waiver is
i n ofi c ou s .

8 3 ) Ge neral Rule : Article 1 2 7 2 . Whenever the private d oc ume nt in which the debt
appe a r s is found in the possession of the debtor, it shall b e p r e s u m e d that the creditor
delivered it voluntarily.
Exception: Unless the contrary is proved.

8 4 ) Article 1 2 7 3 . T h e renunciation of the principal debt shall e xt i ngui sh the acce ss ory
obligations; but the waiver of the latt er shall l e a v e the former in force.

8 5 ) Pledge – is a contract b y virtue which the debtor delivers to the creditor or to a third
person a m o va bl e or instrument e vi d e n c i n g incorporeal rights for the purpose of se c u r ing
the fulfillment of a principal obligation with the unders ta ndi ng that when the obligation is
fulfilled the thing delivered shall b e returned with all its fruits a n d a c ce s s i ons .

8 6 ) General Rule: Article 1 2 7 4 . It is pr e s u m e d that the ac ce ss o ry obligation of p l e d g e

h a s b e e n remitt ed when the thing pl e d ge d, after its delivery to the creditor, is found in

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the poss ession of the debtor, or of a third person who owns the thing.
Exception: Thi s presumption is subject to contrary e vi de nc e . It does not arise if the third
person in poss ession of the thing p l e d g e d does not own the s a m e .

8 7 ) Confusion or merger – is the m e e t i ng in one person of the qualities of creditor a n d

debtor with respect to the s a m e obligation.

88) Re qui s ites of Confusion

· It m u s t tak e pl ac e between the principal debtor a n d creditor

· It m u s t b e complete

8 9 ) Article 1 2 7 6 . Merger which tak es pl a c e in the person of the principal debtor or

creditor benefits the guarantors. Confusion which tak e s pl a c e in the person of a n y of the
latt er does not ext i ngui sh the obligation.

9 0 ) Article 1 2 7 7 . Confusion does not ex ti ngui s h a joint obligation e xc e p t a s regards the

s hare corresponding to the creditor or debtor in whom the two characters concur.

9 1 ) Confusion in solidary obligation – merger in the person of one of the solidary

debtors shall e xt i ngui sh the entire obligation b e c a u s e it is also a merge r in the other
solidary debtors.

9 2 ) Compensation – is the ex t ingui s hme n t to the concurrent amount of the debts of two
persons who, in their own right, are debtors a n d creditors of e a c h other.

93) K i n ds of Compensation:

· B y its eff ect or extent

* Total – when both obligations are of the s a m e amount a n d are entirely e x t i ng ui s he d
* Partial – when the two obligations are of different amounts a n d a ba l a n c e remai ns .

· B y its c a u s e or origin
* L e g a l – when it t a ke s pl a c e b y operation of law e v e n without the knowledge of the
parties
* Voluntary – when it tak es pl a c e b y ag r e e m e n t of the parties
* Judicial – when it tak e s pl ac e b y order from a court in a litigation.
* Facul tative – when it c a n b e set u p only b y one of the parties

9 4 ) Requi sities of L e g a l Compensa tion

· T h e parties are principal creditors a n d principal debtors of e a c h other

· Both debts consist in a s u m of m o ne y, or of c o ns u m a bl e things of the s a m e kind

a n d quality

· T h e two debts are d u e a n d d e m a n d a b l e

· T h e two debts are liquidated

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· No retention or controversy c o m m e n c e d b y a third person

9 5 ) Ge neral Rule : Only the principal debtor c a n set u p ag ai ns t his creditor what the
latt er owes hi m
Exception: Article 1 2 8 0 . Notwithstanding the provisions of the p re ce di ng article, the
guarantor m a y set u p compensation a s regards what the creditor m a y owe the principal
debtor.

96) Total compensation – results when the two debts are of the s a m e amount.

9 7 ) Ge neral Rule : Only debts which are d u e a n d d e m a n d a b l e c a n b e co m pe n s a te d.

Exception: (Thi s is a kind of voluntary compensation) Article 1 2 8 2 . T h e parties m a y
a g r e e upon the compensation of debts which are not yet due .

9 8 ) Voluntary or conventional compensation – incl ude s a n y compensation which t a ke s

pl a c e b y ag r e e m e n t of the parties e v e n if all the requisites for l e gal compensation are
not present.

9 9 ) Article 1 2 8 3 . (Judicial Compensation) If one of the parties to a suit over a n

obligation h a s c l a i m for d a m a g e s ag a i n s t the other, the former m a y set it off b y proving
his right to s a i d d a m a g e s a n d the amount thereof.

100) Article 1 2 8 4 . When one or both debts are rescissible or voidable, they m a y b e
c o m p e n s at e d a ga i n s t e a c h other before they are judicially resci nde d or avoided. After
annul me n t , c o m pe nsa t e d is d e e m e d not t ak en pla c e .

101) Where compensation h a s t ake n pl a c e B E F O R E a s s i g n m e n t – the debtor c a n raise

the de fe n s e of compensation to the a s s i g n e e . T h e r e m e d y of the a s s i g n e e is a ga i n s t the
assignor.

102) T h e right to the compensation m a y b e waived b y the debtor before or after the
a s s i g nm e n t .

103) 3 c a s e s where compensation h a s t ak en pl a c e A F T E R a s s i g n m e n t

· A ss ignme nt with the consent of debtor – debtor cannot set u p compensation

agai n s t the a s s i g n e e unl e ss h e reserved his right to the compensation.

· A ss ignme nt with the knowledge but without the consent of debtor – debtor c a n set
u p compensation

· A ss ignme nt without the knowledge of the debtor – debtor c a n set u p

compensation when h e le arned of the a s s i g n m e n t

104) Foreign E x c h a n g e – h a s b e e n defined a s the conversion of a n amount of m o n e y

or currency of one country into a n equivalent amount of m o n e y or currency of another.

105) Article 1 2 8 6 . In le gal compensation, e v e n though the debts m a y b e p a y a b l e at

different pl a c e s , but there s hall b e a n indemni ty for e x p e n s e s of e x c h a n g e or
transportation to the pl ac e of p a y m e n t b y the party who set u p the compensation.

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106) Ins tanc es when le ga l compensation is not allowed b y law:

· Where one of the d ebts arises from a depositum

· Where one of the d ebts arises from a co mm o da t um

· Where one of the d ebts arises from a c l a i m for support d u e b y gratuitous title

· Where one of the d ebts consists in civil liability aris ing from a pe n al off ense

107) Deposit – is constituted from the mome nt a person re ce i ve s a thing bel ongin g to
another with the obligation of safel y k e e p i n g it a n d of returning the s a m e .

108) C o m m o da t um – is a gratuitous contract whereby one of the parties delivers to

another s omethi ng not c o ns u m a bl e so that the latt er m a y u s e the s a m e for a certain
time a n d return it.

109) Support – compris es eve rythi ng that is i ndi sp e ns a bl e for s us t e na nc e , dwelling,

clothing, m e di c a l att endance , education a n d transportation, in k e e p i n g with the financial
c a p a ci t y of the family.

110) Article 1 2 8 9 . If a person should h a v e a ga in s t h i m s ever al debts which are

susc ep tible of compensation, the rules on the application of p a y m e n t s shall a p p l y to the
order of the compensation.

111) Article 1 2 9 0 . When all the requisites mentioned in article 1 2 7 9 are present,
compensatiion t a k es effect b y operation of law, a n d e x t i n gu i s he s both debts to the
concurrent amount, e v e n though the creditors a n d debtors are not aware of it.

112) Article 1 2 9 1 . Obligations m a y b e modified b y:

· C h a n g i n g their object or principal conditions

· Substituting the person of the debtor

· Subrogating a third person in the right of creditor

113) Novation – is the extinction of a n obligation through the creation of a new one
which substitutes it.

114) D u a l function of novation – it is a contract containing two stipulations: one to

ex t ingui s h a n exis t ing obligation, the other to substitute a new one in its pl ac e . It
operates a s a relative extinction only.

115) K i n ds of Novation

· According to origin:

o L e g a l – tak e s pl a c e b y operation of law

o Conventional – ta k es pl a c e b y ag r e e m e n t of the parties

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· According to how it is constituted:

o E x p r e s s – declare d in unequivoc al terms

o Implied – when the old a n d new obligations are essentially incompatible with e a c h
other

· According to extent:

o Total or extinctive –when the old obligation is completely e x t i ngui sh e d

o Partial or modificatory – when the old obligation is me re l y modified

· According to subject:

o R e a l or objective – when the object or principal conditions are c h a n g e d

o Personal or subjective – when the person of the debtor is substituted and/or when a
third person is subrogated in the rights of the creditor

o Mixed – when the object a n d the debtor or the creditor, or both the parties, are
c h a n g e d . It is a combination of real a n d personal novations.

116) Article 1 2 9 2 . In order that a n obligation m a y b e e x t i ng ui s he d b y another which

substitutes the s a m e , it is imperative that the old a n d the new obligations b e on e ve r y
point incompatible with e a c h other.

117) Re qui s ites of Novation

· A previous va lid obligation

· C a p a c i t y a n d intention of the parties to modify or ex t ingui s h the obligation

· T h e modification or ext i ngui shme n t of the obligation

· T h e creation of a new valid obligation

118) Novation is never pr e s um e d. It m u s t b e clearly a n d u nm i s t a k a bl y es t ablis hed

either b y the e x p r e s s ag r e e m e n t of the parties or ac ts of equivalent import or b y the
incompatibility of the two obligations with e a c h other in e ve r y material respect.

119) Article 1 2 9 3 . Novation which consists in substituting a new debtor in the pl a c e of

the original one, m a y b e m a d e e v e n without the knowledge or agai n s t the will of the
latt er, but not without the consent of the creditor.

120) K i n ds of personal novation:

· Substitution – when the person of the debtor is substituted

· Subrogation – when a third person is subrogated in the rights of the creditor

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121) K i n ds of Substitution

· Expromission – t a ke s pl a c e when a third person of his own initiative a n d without

the knowledge or agai n s t the will of the original debtor a s s u m e s the latt er’s obligation
with the consent of the creditor. It is essential that the old debtor b e release d from his
obligation, otherwise, there is no expromission.

· D el e g a c i on – tak es pl a c e when the creditor a c c e p ts a third person to take pl a c e of

the debtor at the ins t ance of the latt er. All the parties, the old debtor a n d the new
debtor, a n d the creditor m u s t ag r ee .

122) Article 1 2 9 4 . If the substitution is without the knowledge or a ga i n s t the will of the
debtor, the new debtor’s ins olvenc y or non-fulfillment of the obligation s hall not g i v e rise
to a n y liability on the part of the original debtor. (Expromission)

123) Ge neral Rule: T h e old debtor is not liable to the creditor in c a s e of the ins olve ncy
of the new debtor.
Exceptions: (In c a s e of De l e ga c i on)
a ) T h e s a i d in s olve ncy was a lrea dy ex is ti ng AND of public knowledge (although it was not
known to the old debtor) at the time of the dele g aci on
b) T h e insolve nc y was already ex is ting AND known to the debtor (although it was not of
public knowledge) at the time of the dele g aci on

124) Ge neral Rule: Ex t ingui s hm e n t of the principal obligation carries with it that of the
acce s s ory obligations.
Exception: In the c a s e of a n ac c es s ory obligation created in favor of a third person which
r em ai ns in force unl es s sa i d third person g i v e s his consent to the novation.

125) Ge neral Rule: There is no novation if the new obligation is void a n d, therefore,
the original one shall subsist for the reason that the s eco nd obligation b e i n g inexistent, it
cannot ex t ingui sh or modify the first.
Exception: In c a s e where the parties intended that the old obligation should b e
e x t ingui s he d in a n y even t.

126) If the new obligation is only voidable, novation c a n take plac e . But the m omen t it
is annulle d, the novation m u s t b e considered a s not h a v i n g ta ken pl ac e , a n d the original
one c a n b e enforced, u nl e ss the intention of the parties is otherwise.

127) Article 1 2 9 8 . T h e novation is void if the original obligation was void, E X C E P T

when annul m e nt m a y b e c l a i m e d only b y the debtor, or when ratification va lida tes ac t s
which are voidable.

128) Article 1 2 9 9 . If the original obligation was subject to a s u s p e n s i v e or resolutory

condition, the new obligation shall b e under the s a m e condition, U NL E S S it is otherwise
stipulated.

129) K i n ds of Subrogation

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· Conventional – when it t a k es pl a c e b y e x p r e s s ag r e e me n t of the original parties

a n d the third person

· L e g a l – when it t ak e s pl ac e without ag r e e m e nt but b y operation of law (not

p r e s u m e d e x c e p t in c a s e s e x p r e s sl y stipulated b y law)

130) C a s e s of L e g a l Subrogation

· When a creditor p a y s another creditor who is preferred

· When a third person without interest in the obligation p a y s with the approval of
the debtor

· When a third person with interest in the obligation p a y s e v e n without the

knowledge of the debtor

131) Article 1 3 0 3 . Subrogation transfers to the person subrogated the credit with all
the rights thereto appertaining, either agai n s t the debtor or a gai n s t third persons, b e
they guarantors or possessors of mortgage s , subject to stipulation in a conventional
subrogation.

132) Article 1 3 0 4 . A creditor, to whom partial p a y m e n t h a s b e e n m a d e , m a y e xe r c i s e

his right for the remainder, a n d h e shall b e preferred to the person who h a s b e e n
subrogated in his pl a c e in virtue of the partial p a y m e n t of the s a m e credit

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