OBLIGATIONS

Integrated RFBT
3rd Term AY 2021-2022

KINDS OF OBLIGATIONS
TYPE Definitions
An obligation based on positive law; a juridical necessity to give, to do,
Civil or not to do, (Article 1156) gives a right of action to compel their
performance. (Article 1423)
An obligation based on equity and natural law; merely authorizes the
Natural retention of what has been voluntarily delivered or rendered, but
does not grant a right of action to compel their performance.
An obligation based on moral or spiritual law developed by religious
Moral
organization; does not, in general, grant an enforceable right in court.

DEFINITION OF CIVIL OBLIGATIONS

Legal Definition Complete Definition
Juridical necessity, to give, to do, or not to do. A juridical necessity on the part of the debtor to
(Article 1156) perform a particular conduct (i.e., to give, to do,
or not to do), which gives the creditor the right to
compel performance, or to rescind the obligation,
in case of non-compliance.

SOURCES OF CIVIL OBLIGATIONS

An obligation must originate from a source; without a source, there can be no obligation. (Metropolitan
Bank v. Rosales, GR 183204, 13 Jan 2014)

Nature and Effects of Civil Obligations

Duties of the Debtor Duties of the Creditor
Prestation to Give a Specific Thing
A thing is determinate or specific if it is particularly designated or physically segregated from all
others of the same class. ( Article 1460 )
Delivered the thing agreed upon. Article 1165, Compel Performance. Article 1165, par.1 Article
par.1 Article 1423 and 1233 1423 and 1233
Preserve or take care of the thing with due Hold the debtor responsible for the preservation
diligence prior to its delivery. Article 1163 of the thing is delivered, and to hold him liable
even for a fortuitous event, if he delays delivery,
or of he promised to deliver the same thing to
two or more persons having different interest.
Article 1165
Deliver the fruits of the thing from the time the Received the fruits, interests, accessions, but the
obligation arises. Article 1164, including creditor acquires no real right to such fruits until
accessions and accessories. the same are delivered to him. Article 1165
Pay damage in case of breach. Article 1170 Specific performance plus damages. Article 1165

Recission plus damages, if the obligation is

reciprocal. Article 1191
 Prestation to Give a Generic Thing
A thing is indeterminate or generic if it can only be identified by its kind or genus without being
distinguished from others of the same class.
Deliver the thing of the quality intended by the Specific performance, or obtain compliance from
parties, taking into consideration the purpose of another person at the expense of the debtor.
the obligation and other consideration. Article Article 1165, par.2 and 1233
1246.
Recission, if the obligation is reciprocal. Article
1191
Pay damages in case of breach. Article 1170 Demand for damages in case of breach –
equivalent performance.

Ordinary Prestation to Do
If, by the nature of the obligation or by stipulation, the act can be performed by a person other than
debtor.
Perform the service completely. Article 1233 Demand for specific performance, Article 1423,
but can not compel the debtor to perform the
service.

Rescission, if the obligation is reciprocal. Article

Shoulder the cost of having a third person do it.
Undo what has been poorly done.
Pay damages in case of breach. Article 1170
1191
Have the same executed by a third person at the
cost of the obligor – substitute performance.
Article 1167 par.1
Ask that it may be decreed that what has been
poorly done be undone. Article 1167, provided it
can still be undone
Demand for damages in case of breach –
equivalent performance.

Prestation to Do a Purely Personal Act

If, by the nature of the obligation, or by stipulation, the act can be performed solely by the debtor.
Perform the personal service completely. Article Demand for damages in case of breach since
1233 personal qualifications of the obligor are
involved. Specific performance is not available as
it violates the involuntary servitude clause of the
Constitution. Section 18(2) Article III
Pay damages in case of breach. Article 1170 Demand for damages in case of breach.

Prestation Not to Do
Not to do what is prohibited
Shoulder the cost of undoing what should not be Have the same undone at the expense of the
done. debtor – substitute performance. Article 1167
Pay damages in case of breach. Article 1170 Demand for damages where it would be
impossible to undo what has been done, or if the
act or its consequences are definite and will not
 cease even if undone. GR L-4811 31 July 1953
Woodhouse v Halili

MODES OF BREACHING A CIVIL OBLIGATION

An obligation is breached when a prestation is not performed for various reasons ranging from
intentional acts of the creditor to those of the debtor.

1. Acts of the creditor – The debtor is released from liability when the non-performance of an
obligation is due to the acts of the creditor himself. Article 1203, 1256 and 2080
2. Delay (Mora) – Pertains to the non-fulfillment of obligation in a timely manner. Under Article
1169, the principle is “no demand, no delay,” except in the following instances: a) express
declaration by law: b) there is a contrary stipulation: c) when the designation of time is the
controlling motive (“time is of the essence”): d) when demand would be useless; and e) when
the debtor admits the delay. (Cabanting v BPI Family Savings Bank, GR 201927, 17 Feb 2016)

Types of Mora and Their Consequences

Definition Consequences
Delay on the part of the debtor Debtor assumes the risk of loss
in an obligation to deliver a
There is no delay (and no need determinate thing even if loss
for demand) in a prestation not was due to fortuitous event.
to do. Article 1165 par.3
Mora Solvendi
He is liable for damages. Article
1170

He is liable for interests in case

of money obligations. Article
2209
Delay on the part of the creditor 1. The creditor is liable for
in accepting performance. damages sustained by
Requisites: the debtor;
1. The obligation is due 2. The debtor may relieve
(debtor properly himself of the
offered to perform on obligation by
the due dates); consignation. Article
2. The creditor made a 1256
Mora Accipiende demand, unless a 3. The debtor is exempt
demand is not from risk of loss, and
necessary; from paying interests in
3. Offer of performance case of monetary
matches the prestation; obligations; and
and 4. The responsibility of the
4. Creditor refused to debtor for the thing is
accept performance reduced to fraud or
without just cause. gross negligence.

Compensation Morae
Delay of both parties in a
reciprocal obligation. However,
parties may stipulate the order
in which they shall comply with
their reciprocal obligations.
Respective liabilities of the
creditor and debtor are offset.
Article 1192 Fong v Duenas, GR
185592 15 June 2015

3. Negligence (Culpa) – It is the absence of diligence required by the obligation. If the law or
contract does not state the diligence that is to be observed in the performance of the obligation,
that which is expected of a good father of the family shall be required.

Type of Culpa Measure of Damages

Culpa Criminal – Negligence which is the
proximate cause of a crime.
Civil Negligence:
1. Culpa Contractual – That which
prevented the fulfillment of a pre-
existing contractual obligation; Articles
1172-1173
2. Culpa Aquiliana or Quasi-Delict –
Without a pre-existing contractual
obligation. Article 2176
3.
The natural and probable consequences of the
breach of the obligation, which the parties have
foreseen at the time of its constitution, Article
2201, par.1, may be regulated by courts,
according to the circumstances. Article 1172
However, when negligence shows bad faith,
already amounting to fraud, all damages which
may be reasonable attributed to the breach.
Article 1173 and 2201, par.2

4. Fraud (Dolo) – This refers to the deliberate and intentional evasion of normal fulfillment of the
obligation. There are two kinds of fraud.

Type of Dolo Definition

Causal or contractual fraud which induce one
party, through insidious words or machinations of
Dolo Causante one of the other, to enter into a contract which,
without them, he would not have agreed to;
renders the contract voidable. Article 1338
Fraud referred to in Article 1170 is fraud
committed in the performance of the obligation;
Dolo Incidente will not annul the contract, but results in a breach
of the obligation resulting in liability for damages.
Article 1344

Any waiver of an action for future fraud is void. Article 1171

5. Contravention of the tenor of obligation – Includes any illicit act which impairs the strict and
faithful fulfillment of the obligation, and every kind of defective performance. (Arrieta v
National Rice and Corn Corp GR L-15645 31 Jan 1964)
6. Fortuitous Event – An unforeseen event, or foreseeable but inevitable, which prevents the
fulfillment of an obligation; generally exempts a debtor from liability for the non-performance of
an obligation. Article 1174.
ENFORCEMENT OF LIABILITY IN CASE OF BREACH

Action Description
Enforcement of the liability (through a writ of
Execution of Judgment execution) against the debtor’s properties. Article
1177.
Execution of judgment having failed to fully
satisfy the creditor’s claim, creditor may exercise
all the rights and bring all the actions pertaining
Accion Subrogatoria to the debtor; Article 1177, not necessary that
the judgment creditor’s claim ante-dates the
claim of the judgment debtor against the third
person.
Subrogatory action having failed or is not
available, the judgment creditor may petition to
Accion Pauliana
revoke certain acts of which may have defrauded
the judgment creditor, Article 1381
Remedies specific to special contracts like
sublease, conventional redemption, contract for
Accion Directa
a piece of work, sub-agency. Article 1608, 1652,
1729 and 1893

KINDS OF CIVIL OBLIGATIONS

Pure and Conditional Obligations

An obligation which is immediately demandable,

because neither its efficacy nor its demandability
is dependent upon the happening or non-
Pure happening of a condition, or the arrival of a term.
Article 1179. The nature and effects of
obligations outlined in Articles 1163-1178 pertain
to this kind of obligation.
An obligation whose effectivity or termination is
contingent upon the happening or the non-
Conditional happening of a future event which is uncertain to
happen, or upon a past event that is unknown to
the parties. Article 1181

OBLIGATIONS WITH A CONDITION

Classification Description
Uncertain future event that puts the efficacy of
an obligation in a state of suspense; if the
suspensive condition happens, the obligation
Suspensive
becomes retroactively effective and immediately
demandable; otherwise the obligation will not
even exist. (id)
 Obligation is immediately demandable, but the
happening of that uncertain future event
Resolutory
constituting the condition extinguishes the
obligation. Article 1179 par.2 and 1181
Fulfillment of this condition is dependent upon
Potestative the will of one of the contracting parties. Article
1182
Fulfillment of this condition is purely dependent
Casual on chance or luck, or other factors, and not upon
the will of either parties.
Fulfillment of this condition is dependent partly
Mixed upon chance or luck, and partly upon the will of a
third person.
Requires an event to happen at some future
time; Article 1184, the obligation is extinguished
Positive if the event does not happen at the appointed
time, or if it becomes indubitable that the event
will not happen.
Requires an event not to happen at some future
time; Article 1185, the obligation is effective if at
the lapse of the specified period the event did
Negative
not occur, or even prior to the specified period, if
it becomes indubitable that the event will not
occur during such specified period.
Juridical Impossibility – Impossibility of a
condition because it is contrary to law, morals,
good customs or public policy. Article 1183

Physical Impossibility – Impossibility of a

condition because it is contrary to the laws of
nature, or is an absurdity.
Impossible
Article 1183 pertains only to an impossible
condition that is both positive and suspensive, as
it shows the lack of intention of the parties to be
bound by the obligation. Hence, impossibility of
the condition must exist at the time of the
constitution of the obligation.

LOSS, DETERIORATION OR IMPROVEMENT OF THE THING BEFORE FULFILLMENT OF THE CONDITION

(Article 1189)

1. If the condition is suspensive

Cause Effect
Thing is lost, or it perishes, or goes out of Obligation is extinguished, Article 1174 and 1262,
commerce, or disappears in such a way that its However, even if without fault, the debtor may
 existence is unknown or may not be recovered,
without the fault of the debtor.
Thing deteriorates (i.e., the substance or value of
the thing is impaired, but does not amount to a
loss) without the fault of the debtor.
Thing deteriorates due to the fault of the debtor
Thing improved by nature or lapse of time
Improvement was introduced by the debtor.
still be held liable (id) if so provided by law, or by
stipulation of the parties, or if the debtor
assumed the risk of loss.
Creditor bears the impairment
Creditor may rescind the obligation, or accepts
the thing in its impaired condition with right to
damages in any case.
Improvement shall inure to the benefit of the
creditor as consequence of accession.

2. If the condition is resolutory – The same rules apply, Article 1190, par.2, but the debtor is the
party duty-bound to return the thing upon the happening of that condition.

OBLIGATION WITH A TERM

In an obligation with a term, the demandability or termination thereof is subject to the arrival of a
certain point in time (a day certain).

Distinction
Term Condition
As to Certainty
It is a future event that is certain to happen, It is a future event that is uncertain to happen.
either on the date predetermined by the parties,
or a date unknown to them. Thus, it merely refers
to the passage or lapse of time.
As to Time
It always refers to a future time It may refer to a past event which is unknown to
the parties.
As to Effect on Obligation
Because it is certain, the term affects only the If suspensive, it affects the efficacy of the
demandability of an obligation, not the efficacy obligation, thus, only giving effect thereto once it
or the very existence thereof. Thus, it generally has been fulfilled.
does not have retroactive effects, unless there is
agreement to that effect. If resolutory, it extinguishes an obligation that
already exists.
Effect of Being Purely Potestative
Does not invalidate an obligation, but gives the Voids the obligation if left solely to the will of the
court the authority to fix its duration. Article debtor.
1197 par.2
But a term that is left to the discretion of the
creditor neither invalidates an obligation nor
gives the court the authority to fix it (payable on
demand).
OBLIGATIONS WITH MULTIPLE PRESTATIONS

Creditor may demand all prestation and debtor

Conjunctive
must completely perform the same.
Debtor’s performance of one or some (but not
Disjunctive all) of the prestation is sufficient; depending on
the tenor, a disjunctive obligation may be:
Debtor’s complete performance of one or some
Alternative (but not all) of the prestation discharges the
obligation. Article 1199
Debtor must perform the principal prestation,
but has the right to substitute the same with any
Facultative
one or some of the substitute prestation. Article
1206, par.1

Alternative Obligations: Loss of the Thing Due

Who caused the
Who Chooses What was Lost Rule
Loss
Creditor entitled to damages
based on the amount of the
last thing that disappeared
Everything
or service that became
impossible. Article 1204
par.2
Debtor chooses from among
Debtor Debtor
the remainder, and delivers
Some
the same; creditor not
entitled to damages
Debtor delivers the thing
that remains; Article 1202,
All but One
creditor not entitled to
damages
Debtor released from the
Everything
obligation. Article 1262
Debtors chooses from
among the remainder, and
Some
delivers the same; creditor
Fortuitous Event
not entitled to damages
Debtor delivers the thing
that remains; Article 1202,
All but One
creditor not entitled to
damages
Debtor delivers the
remaining thing, or rescinds
Creditor All but One
contract; creditor liable for
damages. Article 1203
 Creditor entitled to the price
of any one of them; debtor
Everything
liable for damages. Article
1205(3)
Debtor Creditor may claim any of
those subsisting, or
Some price/value of the thing;
debtor liable for damages.
Creditor Article 1205 (2)
Debtor released from the
Everything
obligation. Article 1262
Creditor chooses from
among the remainder, and
Fortuitous Event Some
debtor delivers the same.
Article 1205(1)
Debtor deliver the thing that
All but One
remains. (Id)

OBLIGATIONS WITH MULTIPLE SUBJECTS

Types of Obligations with Multiple Parties

1. Joint – The credits (receivables) or debts (payables) are considered distinct from one another,
thus, divided into as many shares as there are creditors and/or debtors. Article 1208, applies as
a general rule when the relationship of multiple parties is undefined. Article 1207 and 1208.
2. Solidary – Each of the multiple creditors is given the right to demand complete performance of
the obligation, while each of the multiple debtors is duty-bound to perform the entire
obligation. Article 1207.

NATURE OF SOLIDARITY

Active Solidarity Passive Solidarity

There is mutual agency (mutual power of
responsibility) among the creditors
The debtor may pay anyone of the solidary
creditors, but if any creditor made the demand,
the debtor must pay the creditor making the
demand. Article 1214
A solidary creditor may not assign his rights
without the consent of the others. Article 1213
There is mutual guaranty among the debtors
(each solidary debtor guarantees the payment of
the shares of the other solidary debtors).
Any one of the solidary debtors may be
compelled by a creditor to fulfill the entire
obligation. Article 1216
Upon payment, the solidary debtor who paid the
obligation may claim from the other co-solidary
debtors the share corresponding to each, as well
as interests from the time of payment. Article
1217
A solidary debtor is responsible to the creditor if
the thing due has been lost or the prestation has
become impossible due to the fault of any one of
them, or as a result of delay, Article 1221, But if

Each of the solidary creditors may do whatever is
useful, and not those prejudicial to the others.
Article 1212. But a solidary creditor may agree to
novation, compensation, merger or condonation
of the debt with the debtor, without obtaining
the consent of the other solidary creditors.
Article 1215
A solidary creditor may release the debtor,
provided that he shall be liable to the other
solidary creditors for their share in the
discharged obligations. (Id)
the loss was without fault on their part, the
obligation is extinguished.
A solidary debtor may avail of all defenses in
actions filed by the creditor, even those which
personally pertains to another solidary debtor,
but in this case only as regards that part of the
debt for which the latter is responsible. Article
1222

INDIVISIBLE and DIVISBLE OBLIGATIONS

The divisibility or indivisibility of an obligations pertains to the performance of the prestation, specifically,
whether (i) performance must be in full (Article 1233 re: rule of integrity of payment) or (ii) performance
in parts or installments is permissible.

JOINT INDIVISIBLE OBLIGATION

If the thing that is due is not capable of division (an indivisible thing), by necessity it can not be performed
in parts (an indivisible obligation); The several creditors are presumed to be joint; so are the several
debtors. The right of the joint creditors maybe prejudiced only by their collective acts (not by their
individual acts) and the debt can be enforced only by proceeding against all joint debtors (not against
them individually) Article 1209, but the joint debtors shall not be liable for the share of the insolvent joint.
(Id)

OBLIGATIONS WITH A PENAL CLAUSE_

A penalty is an accessory or additional obligations assumed by the debtor in case he breaches the principal
obligation. As an accessory obligation, the nullity thereof does not carry with it the nullity of the principal
obligations (Article 1230). It is not meant to enrich the creditor by reasons of the debtor’s default, or to
become a source of additional income, or to gain any other benefit for the creditor. (Rivelisa Realty Inc vs
First Sta Clara Builders GR 189618 15 Jan 2014)

MODES OF EXTINGUISHING A CIVIL OBLIGATION

An obligation is extinguished by the Payment, Loss, Remission, Merger, Compensation, and Novation; and
other modes of extinguishing an obligation are; annulment, recission, fulfillment of a resolutory condition,
and prescription (Article 1231), as well as death of a debtor for intransmissible obligations, abandonment,
unilateral and mutual dissent.

PAYMENT OR PERFORMANCE
Payment or performance is the primary mode of extinguishing an obligation. The more accurate term is
performance. Article 1232, clarified that payment covers not only the delivery of money, but also the
delivery of a thing or rendering of a service. Note that payment by check, even a manager’s check, is not
payment until the same has been honored and encashed.
REQUISITES
1. Made by the debtor, or his authorized representative:
2. Made to the creditor, or his authorize representative; and
3. Strictly correspond to the prestation, including all incidental stipulations (e.g., time, place,
manner).

TWO FUNDAMENTALS RULES OF PAYMENTS

Integrity of Performance – The obligation must be completely performed or rendered (Article 1233).
Unless expressly stipulated, a creditor may not be compelled to receive partial payments. The
exceptions to this principle are:
a. Substantial Performance, where incomplete or irregular performance may still discharge a
debtor, so long as it can be shown that the debtor attempted in good faith to comply with the
obligation, and the deviation or defect is slight, technical or immaterial (Article 1234);
b. Waiver, if despite the knowledge of incomplete or irregular performance, the creditor still
accepted the same (Article 1235); and
c. Those where the law permits partial payments for the partly liquidated debt (article 1248), for
the satisfaction of the more onerous debt in application of payments (Article 1254), in case of
several debts susceptible of compensation (article 1289), and in cse of an obligation of several
joint debtors whose respective shares thereof are subject to different condition (Article 1208
and 1211).

IDENTITY OF PERFORMANCE – The performance must correspond to the prestation.

APPLICATION OF PAYMENT (Article 1252)

In case a debtor owes several debts to the same creditor, the rules on application of payment provide
guidelines as to which particular debt the payment shall be applied.

SPECIAL FORMS OF PAYMENT

The special forms of payment vary, in one way or another, the elements of a regular payment.

Dation and cession deviate from regular payment is so far as they allow payment or performance in the
form different from the prestation originally agreed upon. Thus, it may be viewed as a form of objective
novation.
Dation in Payment Payment by Cession
Property Ceded
The debtor cedes specific property or properties The debtor cedes all his properties (other than
to his creditor. Article 1245 those exempt from execution) to his creditors.
Article 1255
Creditors Involved
The delivery of the property is to apply the Most frequently, there are several creditors to
property is to apply the property to the whom the properties of the debtor are ceded
satisfaction of a specific debt owed to a specific collectively, in payment of their credits. Article
creditor. Article 1245 568.
However, payment by cession may also be made
to a single creditor where the ceding debtor
delivers all his assets to the said creditor
Right/s Acquired
 The creditor acquires ownership of the property The creditors are entitled to sell the property and
ceded and the debt is thus extinguished. Article to apply the proceeds of the sale to their credits.
1245 in relation to 1458. Dacion is governed by They do not acquire ownership of the properties
the law on sales ceded.
Extent of Extinguishment of the Debt
The delivery of the debtor’s property to the The delivery of the debtor’s properties to the
creditor extinguishes the money debt, except if creditors will extinguish the debt only to the
the debtor and the creditor agreed that the dacion extent of the recovery of the creditors, unless
is only in partial payment of the debt. PNB vs Dee there is an agreement between the debtor and the
GR 182128 19 Feb 2014 creditors that the delivery of the properties will
extinguish all the debts in full. Article 1255

CONSIGNATION deviates from regular payment in so far as the debtor delivers payment to the court,
not to the creditor directly.

REQUISITES OF A VALID CONSIGNATION

The debt is due and liquidated
The debtor must have made a valid tender of
payment.
The creditor unjustly refused to accept the
payment. Article 1256
First notice is given to the creditor informing him
that the thing will be consigned to the court if he
refuses to accept payment. Article 1257
Debtor must physically place the thing at the
disposal of the court.
Second notice must be given to the parties who
have an interest in the fulfillment of the
A debt envisions a juridical necessity to pay; the
redemption of property subject to a right of
repurchase does not constitute an obligation to
pay, but only a privilege to redeem the property.
Exceptions:
1. When the creditor is absent or unknown.
2. When the creditor does not appear at the
place of payment.
3. When the creditor is incapacitated to
receive the payment.
4. When, without just cause, the creditor
refuses to issue a receipt.
5. When two or more persons claim the
same right to collect;
6. When the title of the obligation has been
lost; and
7. When the debtor does not know whom
to pay. (Spouses Cacayorin vs Armed
Forces and Police Mutual Benefit
Association Inc GR 171298 15 April 2013
No valid reason for not accepting payment.
Not mandatory, but if first notice is given, and the
court finds the consignation to be improper, the
debtor shall pay the expenses of consignation.
Physical delivery of the thing is required.
Service of summons is functionally equivalent to
the second notice
 obligation, informing them of the fact of judicial
consignation. Article 1258

LOSS OF THE THING DUE; IMPOSSIBILITY OF PERFORMANCE

While Article 1262 provides for the loss of the thing due, what really extinguishes an obligation is the
subsequent impossibility of performance. The mode extinguishes only an obligation to deliver a specific
thing and to render the service.

DOCTRINE OF UNFORSEEN EVENTS

The basis of Article 1267 is the public international law principle of rebus sic stantibus. Since the intention
of the parties is the governing law of the contract, if the prevailing conditions at the time of its perfection
have ceased to exist it becomes inequitable to enforce a contract. However, the Doctrine of Unforeseen
Events applies only in exceptional cases, and it does not confer general right to break a contract resulting
from difficulty of performance. (This is not the same as a fortuitous event.)

REMISSION OR CONDONATION
It refers to the act of the creditor in gratuitously renouncing the debtor’s obligation; gratuitous waiver of
performance.

REQUISITES
1. Debt must be demandable
2. Condonation must be gratuitous; Article 1270
3. As it is in the nature of a donation, it must comply with the form of a donation, (Victor Yam vs
CA GR 104726 11 Feb 1999)
4. Parties must have the capacity;
5. It must not be inofficious; Article 1270 par.2 750 and 752, and
6. In express condonation, form of donation must be followed. (Article 1270 par.2 748-749)

MERGER OR CONFUSION
While there may be multiple parties to an obligation, there must always be two identities: a) active
subject; and b) passive subject. Once these two identities are merged into a single person, the obligation
is extinguished. Article 1275

REQUISITES
1. Must take place between principal creditor (person principally entitled to collect) and principal
debtor (person primarily obliged to pay); there can be no confusion if the identities involved are
merely secondarily or contingently liable, Article 1276
2. Must refer to the same obligation; and
3. Must be complete or total, must extinguish the obligation as a whole, merger is not
contemplated to cause, nor could it result in, the partial extinguishment of the obligation,
except in the case envisioned in Article 1277 [i.e., confusion extinguishes a joint obligation only
to the extent of the corresponding shares of a joint creditor (with respect to the credit) and
share of a debtor (with respect to the debt) in whom the separate identities of the debtor and
the creditor are merged].

COMPENSATION OR OFFSET
It is a process by which two or more obligations reciprocally owing by two persons to each other are
extinguished to the extent of their concurring amounts.
TYPES OF COMPENSATION
Takes place by operation of law (without need of
Legal consent of the reciprocal debtor and creditor) if
all the elements in Article 1279 are present.
Takes place only by agreement of the parties
(Article 1282); does not require the concurrence
of the elements required referred to in Article
1279; since it is essentially a contract, both
Conventional
parties must have the requisite legal capacity: a)
for the debtor, the capacity to alienate and the
free disposal of the thing due; and b) for the
creditor, capacity to administer the property.
Decreed by the court in the case of a proved
counterclaim asserted by defendant against
plaintiff; Article 1283, the ultimate liability of
Judicial defendant to plaintiff is the amount of proven
claim minus the proven counterclaim; there is
compensation between the claim and the
counterclaim.
Extinguishes both obligations in their entirety, as
Total when the compensating obligations are of equal
amount. Article 1281
Extinguishes the compensating obligations only in
part, leaving an outstanding balance in one of the
Partial
obligations; this occurs when the compensating
obligations are not equal amounts.

REQUISITES OF LEGAL COMPENSATION

1. Each debtor is principally bound to the other. As a general rule, there is no legal compensation
when one of the debtors is not principally bound to the performance of the obligation (e.g., a
guarantor or surety). However, in Article 1280, a guarantor may set up legal compensation as
regards a debt that may be owing to the creditor by the principal debtor, provided that such
compensation is timely raised. (Phil Trust Co. vs spouses Roxas, GR 171897 14 Oct 2015)
2. Both obligations are money debts, or consist of fungible things.
3. Both debts are due. However, even if the debts are not due, there nay still be conventional
compensation. Article 1282
4. Both debts are liquidated and demandable.
5. Neither of the debts should be involved in any controversy (i.e., not involve in dispute), if
disputed, it is possible that either or both debts may not be liquidated as to amount, or not
demandable at all.

Note that if there was an assignment of credit made by one of the creditors to a third person:
a. If the non-assigning creditor was fully aware of the assignment of credit made by the
assigning creditor, and he consented thereto, he shall not be permitted to set up against the
third-party assignee the compensation that would have otherwise pertained to him had the
credit not bee assigned, unless he notifies the assigning creditor of his reservation of the
right to compensation at the time of giving his consent to the assignment;
 b. If the non-assigning creditor was fully aware of the assignment of credit made by the
assigning creditor, and he objected thereto, he may set up compensation against the third-
party assignee, but the reservation should be understood to pertain only to those claims
which the non-assigning creditor may have against the assigning creditor on the date of the
assignment of credit, and
c. If the non-assigning creditor was totally unaware of the assignment of credit made by the
assigning creditor, the non-assigning creditor may invoke compensation with respect to all
of his claims against the assigning creditor, including all claims which might have accrued
after the assignment of credit to the third-party assignee, up to and until the non-assigning
creditor becomes aware of the assignment of credit. Article 1285

NOVATION
It extinguishes the first obligation by substituting it with a new one. The new obligation replaces the first
one which is extinguished.

TYPES OF NOVATION
Change in the object of the obligation or its
Objective
principal conditions.
Substitution of the person of the debtor
Passive/Subjective 1. Expromission
2. Delegacion
Subrogation of a third person in the rights of the
Active Subjective
creditor
Combination of objective and subjective
Mixed
novation.

REQUISITES OF NOVATION
Or at least an obligation whose existence is
recognized by law (e.g., voidable, unenforceable,
Valid first obligation
and rescissible first obligations, provided they
have not been annulled or set aside)
Or at least an obligation whose existence is
recognized by law (e.g., voidable, unenforceable,
Valid second obligation
and rescissible obligations, provided they have
not bee annulled or set aside).
The execution of a written document to evidence
Extinguishment of the first obligations by the an existing obligation is not a novation. (Ace
constitution of the second obligation Foods Inc vs Micropacific Technologies
GR.200602, 11 Dec2013)

EFFECTS OF NOVATION
1. The first obligation is extinguished and replaced by a new one.
2. Accessory obligations to the first obligation are generally extinguished but may nonetheless
subsist insofar as they may benefit third persons who did not give their consent. Article 1296,
1311.
3. If the first obligation is void, it cannot be novated because a void obligation is existent; Article
1298 in relation to Article 1409, a voidable first obligation may be novated because it is binding
 until annulled; Article 1390, an unenforceable obligation may be novated because while it may
not susceptible to an action for specific performance, it may be ratified; Article 1403, a rescissible
obligation may be novated because it is valid until set aside. Article 1380
4. If the new obligation is void, the first one subsists, unless the parties intended the first obligation
to be extinguished in any case; Article 1297, but the extinguishment of the first obligation would
not be due to novation, but could be remission, abandonment, or mutual dissent.
5. The first obligation may be conditional – either suspensive or resolutory, Article 1299, For
novation to occur, the suspensive condition must have happened in order to give life to the first
obligation, or the resolutory condition must have happened in order to prevent its
extinguishment.
6. The new obligation may be subject to a suspensive condition. Its ability to novate the first
obligation is contingent upon the fulfillment of that suspensive condition. The new obligation
must come to life in order to novate the first obligation.

OBJECTIVE NOVATION – MAY EITHER BE

The intention to novate is declared in
unequivocal terms. It cannot arise from an
accidental change or by the addition of accessory
undertakings. (PCIC vs Petroleum Distributors
Express and Service Corp GR.180898, 18 April 2012) It
cannot be presumed; (SC Megaworld
Construction vs Parad, GR. 183804, 11 Sept
2013). It must be clear and unequivocal (Arco
Pulp and Paper vs Lim GR.206806 25 June 2014)
The first and the new obligations are
irreconcilable on every fundamental point, (Heirs
of Franco vs Gonzales, GR 159709 27 June 2012)
Implied Implied novation cannot arise from an accidental
change or in mere Accessory undertaking. (PCIC
vs Petroleum Distributors and Service Corp
GR.180898, 18 April 2012)

SUBJECTIVE NOVATION
Subjective novation has two forms: a) substituting the person of the debtor; and b) subrogating a third
person in the rights of the creditor.

DEBTOR SUBSTITUTION
Expromission Delegacion
Change of debtor is at the initiative of the Change of debtor is at the initiative of the original
creditor, and does not require the consent of the debtor. This form of novation requires the consent
original debtor. of the creditor, the original debtor, and the
substitute debtor.

Novation by debtor substitution requires that the original debtor be expressly released from the
obligation, and the new debtor assumes his place with respect to the creditor. ( Starbright Enterprise vs
Phil Realty Corp, GR 177936 18 Jan 2012.
SUBROGATION OR CREDITOR SUBSTITUTION
Subrogation is novation by changing the person of the creditor. ( Article 1302 ).It transfer 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. ( Article 1303 ). Subrogation may be:

Legal Conventional
Takes place by operation of law; never presumed By agreement; it requires the consent of the
except in the following instances; (Article 1302) original debtor, the original creditor, and the
a) when a creditor pays another creditor who is subrogated creditor; ( Article 1301 ), must be
preferred, even without the debtor’s knowledge; clearly established in order to take effect. (Article
b) when a third person, not interested in the 1302)
obligation, pays with the express or tacit approval
of the debtor;( In relation to Article 1236-1238),
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. (In
relation to Article 1236)

END OF LAW ON OBLIGATIONS