REGULATORY FRAMEWORK IN BUSINESS TRANSACTIONS

TOPIC 1: LAW ON OBLIGATIONS

OBLIGATIONS (ARTICLE 1156)

 Juridical necessity to give, to do, or not to do.

Art. 1423. Obligations are civil or natural. Civil obligations give a right of action to compel their performance. Natural
obligations, not being based on positive law but on equity and natural law, do not grant a right of action to enforce their
performance, but after voluntary fulfillment by the obligor, they authorize the retention of what has been delivered or rendered
by reason thereof. Some natural obligations are set forth in the following articles.

REQUISITIES
Active Subject Creditor (has the right to demand performance of the obligation )
Passive Subject Debtor (who is required to perform the obligation)
Prestation Object or Subject matter
Efficient Cause Legal or juridical tie (reason why there’s an obligation) / (Article 1157)

SOURCES OF OBLIGATIONS

Law  Rule of conduct, just, and obligatory

(ex lege)  Not presumed
 Meeting of minds
Contracts
 Have the force of law
(ex contractu) Obligations are
 Should be complied with in good faith
 Lawful, voluntary, and unilateral acts transmissible,
 Give rise to the juridical relation except
a. Negotiorum Gestio – voluntary management without authority a. By nature
Quasi –  Must be neglected or abandoned
b. By stipulation
contracts c. By provision
 No authorization from the owner
(ex quasi- of law
 Except in case of emergency
contractu)
b. Solutio Indebiti – no right to receive the thing delivered by mistake
 No right to receive
 Delivered through mistake
Single act can be
 Punishable by law the source of
Delicts
a. Criminal Liability – proof beyond reasonable doubt Multiple Sources
(ex - maleficio)
b. Civil Liability – preponderance of evidence of Obligation
 Also known as “tort” or “culpa aquiliana”
 Act or omission causes damage by fault or negligence Double recovery
Quasi-delicts
 Act or omission is not allowed
(ex quasi -
 Fault or negligence from a single act
delicto)
 Damage
 Direct relation of cause and effect between act and damage

Vicarious Liability: Under Art. 2180 of the Civil Code, the following are responsible for the damages caused by:

Acts done by: Who is responsible?

Minors children who live in their company The father, in case of his death or incapacity; the
mother
Minors and incapacitated persons Guardians
Employees in the service of the branches in which they are Owners and Managers of establishment or
employed or on the occasion of their functions enterprise
Employees and household helpers acting within the scope of their
assigned tasks, even if the employer is not engaged in any Employers
business or industry
Special agent, except when the damage was caused by the official
The State
to whom the task done properly pertains
Pupils and student or apprentices, so long as they remain in their Teachers or Heads of Establishment of Arts and
custody Trade

Defense: the responsibility shall cease when the persons above-mentioned prove they observed all the diligence of a good
father of a family to prevent damage.

For the employer, specifically, if he is able to prove due diligence in the selection and supervision of the employee. Note that
this defense is not available against the employer's subsidiary liability arising from a delict or crime.

Multiple Sources of Obligations: a single act can be the source of multiple sources of obligations.

Double recovery not allowed: Responsibility for fault or negligence under the preceding article is entirely separate and distinct
from the civil liability arising from negligence under the Penal Code. But the plaintiff cannot recover damages twice for the same
act or omission of the defendant. (Art. 2177)

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 KINDS OF CIVIL OBLIGATIONS

1. AS TO PERFECTION AND EXTINGUISHMENT

A. PURE OBLIGATION – does not depend upon a future or uncertain event; demandable at once
B. CONDITIONAL OBLIGATION – subject to the happening of a condition; FUTURE + UNCERTAIN

Condition: are uncertain events which wields and influence on a legal relationship

KINDS OF CLASSIFICATION
As to when the obligation
should be performed
As to whom or where it depends
As to capacity to be performed
in parts
As to number of obligations are
to be performed when there are
several of them
As to nature
As to how made known to the
other party
As to whether the obligation can
be fulfilled
Suspensive Condition that will give rise to the obligation
Resolutory Condition that extinguishes the obligation
Condition that depends upon the will of one of the contracting parties
a. On the part of the Debtor
i. If Suspensive – the obligation is VOID
Potestative
ii. If Resolutory – the obligation is VALID
b. On the part of the Creditor – the obligation is VALID whether
suspensive or resolutory
Casual Condition that depends upon the chance
Mixed Depends partly upon the will of one of the contracting parties
Divisible Capable of partial performance
Indivisible Not capable of partial performance
Conjunctive All must be performed
Alternative Only one must be performed
Possible Capable of the fulfillment in its nature or law
Impossible Not capable of the fulfillment in its nature
Express Stated
Implied Merely inferred
Positive Some event will happen at a determinate time
Negative Some event will not happen at a determinate time

Potestative Condition: a condition dependent solely on the will of one of the parties.

When void: if it is dependent solely on the will of the debtor and the condition is suspensive in character. This is so, because
if it were allowed by law, there is a possibility that the obligation will never arise.

Constructive or Presumed Fulfillment: The condition shall be deemed fulfilled when the obligor voluntarily prevents its
fulfillment. (Arhele 1186)

Impossible Conditions: shall, annul the obligation which depends upon them. If the obligation is divisible, that part thereof
which is not affected by the impossible or unlawful condition shall be valid.

Impossibility: can either be

1. Physical Impossible – such as a condition requiring the debtor to go to the sun; or
2. Legally impossible – such as when it is contrary to law, good customs, public policy, such as a condition requiring
the debtor to kill somebody.

Effect of fulfillment of conditions:

General Rule: Once the condition has been fulfilled, it shall retroact to the day of the constitution of the obligation. (Article
1187)

Except:
1. Fruits or interests the obligation. ART. 1187
a. Reciprocal Obligations - the fruits are deemed mutually compensated.
b. Unilateral obligations: in unilateral obligations, the debtor as a rule, is entitled to the fruits, unless a
contrary intention appears.

2. Period of prescription - counted still from the time the condition was fulfilled.

Condition where obligation is treated as one with a period: When the debtor binds himself to pay when his means permit
him to do so, the obligation shall be deemed to be one with a period. (Article 1180)

Suspensive conditions with a deadline: The condition that some event happen at a determinate time shall extinguish the
obligation as soon as the time expires or if it has become indubitable that the event will not take place. (Article 1184)

Rules as to improvement, loss or deterioration: In case of obligations to give a specific or determinate thing is subject to a
suspensive condition, the following rules shall be observed in case of the improvement, loss or deterioration of the thing during
the pendency of the condition:

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 Without the fault of the Obligation is extinguished
debtor
LOSS
With the fault of the Debtor is liable for damages
debtor
Without the fault of the Impairment is borne by the creditor
debtor
DETERIORATION Creditor can be:
With the fault of the
1. Exact fulfillment and ask for damages
debtor
2. Ask for rescission and damages
By the nature or time Improvement will inure to the benefit of the creditor
The debtor shall have no other right than that granted to a
IMPROVEMENT At the expense of the
usufructuary, e.g, he may remove the improvement if it will not cause
debtor
damage to the thing.

Effect of happening of a resolutory condition: When the conditions have for their purpose the extinguishment of an
obligation to give, the parties, upon the fulfillment of said conditions, shall return to each other what they have received

C. OBLIGATION WITH A PERIOD/TERM

With a Period – subject to the expiration of a period; FUTURE + CERTAIN

 Determines the effectivity of the obligation
 Distinguish from condition
o As to fulfillment – event may or may not happen
o As to time – refer to future or past event unknown to parties
o As to influence on the obligation – causes obligation to rise
o As to will of the debtor – depends upon the will of the debtor

 Kinds of Term
Period 1. Definite – specific date
2. Indefinite – period may arrive upon the fulfilment
3. Legal – imposed or provided by law
4. Voluntary – agreed upon by the parties
5. Judicial – those fixed by courts

 As to effect, a term/period may be:

o Ex Die – period with suspensive effect
o In Diem – period with resolutory effect
A Day
 Must necessarily come although it may not be known when
Certain

The courts can fix the period in the following circumstances:

1. Under Art. 1191, par. 3: in reciprocal obligations, when one party asked for the rescission of obligation, the court shall decree
such rescission claimed, unless there be just cause authorizing the fixing of a period.
2. Under Art. 1197
Par. 1a. If the obligation does not fix a period, but from its nature and the circumstances it can be inferred that a period
was intended, the courts may fix the duration thereof.
Par.2 b. The courts shall also fix the duration of the period when it depends upon the will of the debtor.

Benefit of the period: GENERAL RULE: Whenever in an obligation a period is designated, it is presumed to have been
established for the benefit of both the creditor and the debtor.

EXCEPTION: from the tenor of the obligation or other circumstances it should appear that the period has been established in
favor of one or of the other.

Consequences of general rule:

1. The debtor cannot be made to pay before the period;
2. The creditor cannot be made to accept payment before the period

2. AS TO PLURARITY OF PRESTATION

a. CONJUNCTIVE usually use the word “and”. In this case, all the prestations must be complied with in order to fulfill
the obligation
b. ALTERNATIVE usually use the word “or”. In this case, performance of the one of the prestations fulfill the obligation.
c. FACULTATIVE only one prestation has been agreed upon, but the obligor may render another in substitution

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 Right of Choice: Creditor Right of Choice: Debtor
Fortuitous Fortuitous Events
All things Extinguished Extinguished
Events
were lost
Fault of Debtor Value of any + Damages Fault of Debtor Value of last + Damages
Fortuitous Fortuitous Events/
Demand from remaining Deliver the remaining
Events Fault of the Debtor
Some were Fault of Debtor Prices of that which was lost + Fault of Creditor
lost Damages Rescission + Damages
Demand from remaining + Perform + Damages
Damages

Alternative Obligation Facultative Obligation

1. Several prestation are due but the complete performance
is sufficient to extinguish the obligation.
2. If they are VOID prestation, others may still be VALID, the
obligation remains.
3. The right of choice is with the DEBTOR, unless expressly
given to creditor.
4. If all prestation are impossible except one, possible must
be given.
1. Only one prestation is due but the debtor may render
another in substitution, the principal obligation is due.
2. The principal obligation is VOID, the debtor is NOT
required to give the substitution.
3. The right of choice belongs ONLY TO DEBTOR.
4. The principal obligation is impossible, the debtor is NOT
required to give substitute.

FACULTATIVE OBLIGATIONS
Lost the? Obligation will
Principal Extinguished
Before Substitution
Substitute Not Extinguished
Principal Not Extinguished
After Substitution
Substitute Extinguished
1 prestation that is due at any point in time.

3. AS TO RIGHTS AND OBLIGATIONS OF MULTIPLE PARTIES

 Each debtor is liable only for a proportionate part of the debt

Joint Obligation
 Each creditor is entitled only to a proportionate part of the credit
 Each debtor is liable for the whole obligation
 Each creditor is entitled to demand payment of the whole obligation
Solidary Obligation  Passive solidarity – part of the debtors
 Active solidarity – part of the creditor
 Mixed solidarity – both debtors and creditors
 This is not covered by New Civil Code. In this case, there are 2 or more creditors and 2 or
more debtors but they are named disjunctively as debtors and creditors in the alternative.
Disjunctive
 The rules on solidary obligations must apply because if rules on alternative obligations will be
applied then the debtor will generally be given the choice to whom shall he give payment.

4. AS TO PERFORMANCE OF PRESTATION

Indivisibility – does not necessarily connote solidarity.

a. Joint Indivisible
 May be prejudiced only by their collective acts,
 The debt can be enforced only by proceeding against all the debtors.
 The others shall not be liable for his share.

b. Solidary Indivisible – if the liability of the debtors is solidary, even the innocent debtor or the one ready to comply
with his part, can be made liable for damages, but he is given the right to seek reimbursement from the debtor at fault
or the one not ready to comply.

 Susceptible of partial performance

Divisible  Execution requires certain number of days of work
 In installments
 Definite things
Indivisible
 Not susceptible of partial performance

5. OBLIGATION WITH A PENAL CLAUSE

GENERAL RULE: The penalty shall substitute the indemnity for damages and
payment of interests in case of non- compliance.
Obligation with a Penal Clause
(Provides for a greater liability on the
EXCEPTION:
part of the debtor in case of non-
 If there is stipulation to the contrary;
compliance)
 If the debtor refuses to pay the penalty;
 If the debtor is guilty of fraud in the fulfillment of the obligation.

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  The accessories undertaking on the part of the debtor
 Insure performance and has double function:
 To provide liquidated damages
 To strengthen the coercive force of the obligation
Penal Clause  Kinds
 Legal – imposed by law
 Conventional – imposed by agreement of the parties
 Subsidiary – only the penalty may be enforced
 Joint – both the obligation and the penalty may be enforced

6. OTHER CLASSIFICATION OF OBLIGATIONS

Real – obligation to give

As to subject matter
Personal – obligation to do or not to do
Positive – obligation to give or to do
As to affirmativeness
Negative – obligation not to do or not to give
Unilateral – where only one parties is bound
As to persons obliged
Bilateral – where both parties are bound

NATURE AND EFFECT OF OBLIGATIONS

Determinate thing – it is particularly designated or physically segregated from all things of the same class
Indeterminate or Generic thing – is NOT particularly designated or physical segregated from all things of the same class

Obligations of one obliged to give a determinate things

1. To take good care of the things with the diligence of a good father (bonus pater familia)
2. To deliver the thing
3. To deliver the fruits of the thing
1) Kinds of Fruits
1) Natural Fruits – spontaneous products of the soil and young and other products of animals
2) Industrial Fruits – produced by land of any kind through cultivation of labor
3) Civil Fruits – fruits which are results
2) Creditor has the right to the fruits of a determinate thing
3) Obligation to deliver the thing arises
4) Rights of the creditor
1) Personal Right – may be enforced by one person to another
2) Real Right – power over a specific thing
4. To deliver its accessions and accessories even if they have not been mentioned
1) Accessories – attached to thing for better use, perfection
2) Accessions – built, planted, addition or improvements

REMEDIES FOR BREACH OF OBLIGATIONS

Determinate Thing Specific Performance

Obligation to Give
Generic Thing Specific or Substitute Performance
Obligation to Do Substitute Performance
Obligation Not To Do May it undone at the expense of the Debtor

RESCISSION AS A REMEDY: TWO KINDS:

1. Rescission in reciprocal obligations, which should've been properly termed as "resolution", is a primary remedy
where the cause of action is substantial or fundamental breach or non-compliance.
2. Rescission under Art. 1301/1303 in rescissible contracts is a remedy of last resort where the cause would normally
be lesion or economic injury to a party

Damages – harm done and the sum of money that may be recovered in reparation for the harm done.
Kinds of Damages (M.E.N.T.A.L)
Moral Physical or mental;
Exemplary Corrective or to set an example
Nominal To vindicate a right when no other kind of damages may be recovered
Temperate Damages cannot be determined; more than nominal but less than compensatory
Actual Actual losses incurred; may be recovered, require proof
Liquidated Predetermined beforehand

Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any
manner contravene the tenor thereof, are liable for damages.

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 SPECIFIC CIRCUMSTANCES AFFECTING OBLIGATIONS IN GENERAL

 Insidious word or machinations of one of the contracting parties; Deliberate or intentional evasion by the
debtor
Fraud a. Causal Fraud or Dolo Causante – affects the validity of the contract
b. Incidental Fraud or Dolo Incidente – does not affect the validity of the contract but damage may
be recovered
 Omission of the diligence required by the nature of obligation
a. Culpa Contractual or Contractual Negligence – results in a breach of contract
Negligence
b. Culpa Aquiliana or Civil Negligence – results in quasi-delicts
c. Culpa Criminal or Criminal Negligence – results in crime or delict
 Non-fulfillment of an obligation with respect to time
 Incur from the time the oblige judicially or extrajudicialy demands
a. Mora Solvendi – delay of the debtor
Delay i. Ex Re – delay in real obligations (TO GIVE)
ii. Ex Persona – delay in personal obligations (TO DO)
b. Mora Accipiendi – delay of the creditor
c. Compensatio Morae – delay of both parties
 Contravention of the tenor of the obligation
Violatio
 Any illicit act which impairs the strict and faithful manners
 Events that could not be foreseen
 No person shall be responsible, except
Fortuitous a. By stipulation
Events b. Nature of the obligation
c. Expressly specified by law
d. Negligence, delay or fraud concurred

Fortuitous events by definition are extraordinary events not foreseeable or avoidable. It is therefore, not enough that the
event should not have been foreseen or anticipated, as is commonly believed but it must be one impossible to foresee or to
avoid.

Elements: To constitute a fortuitous event, the following elements must concur:

a. The cause of the unforeseen and unexpected occurrence or of the failure of the debtor to comply with obligations
must be independent of human will;
b. It must be impossible to foresee the event that constitutes the caso fortuito or, if it can be foreseen, it must be
impossible to avoid;
c. The occurrence must be such as to render it impossible for the debtor to fulfill obligations in a normal manner; and
d. The obligor must be free from any participation in the aggravation of the injury or loss.

General Rule: is that no personal shall be responsible for those events which could not be foresee, or which, though foreseen,
were inevitable.

Exceptions:
1. Declared by stipulation;
2. When the nature of the obligation requires the assumption of risk: e.g., insurance contracts.
3. Expressly specified by law: examples:
a. A possessor in bad faith.
b. If the obligor is already in delay or has promised the same thing to two or more persons who do not have
the same interests.
c. The officious manager may be liable for any fortuitous event under Art. 2147.
4. When negligence, delay or fraud concurred with the fortuitous event.

EXTINGUISHMENT OF OBLIGATIONS

1. Payment or performance

A. PROVISION AS TO THE PAYOR

Payment made by a third person
With consent/ With interest in
Without consent/knowledge
fulfillment
Compel the creditor to accept payment Yes No
Subrogation to the rights of the creditor Yes No
Amount of Reimbursement Full Reimbursement Beneficial Reimbursement

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If third party payor does not intend to be reimbursed: the payment may be treated as a donation. As such it is necessary
that the debtor accept the same for validity.

Capacity and Free Disposal: the payor should have capacity to alienate and the free disposal of the thing due for payment to
be effective. Such that minors (who don't have capacity) and those suffering the penalty of civil interdiction (no free disposal)
cannot make a valid payment.

B. PROVISIONS AS TO THE PAYEE

Payment may be made to:
1. Person in whose favour the obligation has been constituted
2. Successor in interest
3. Any person authorized to receive it
4. If redounds to the benefit of the creditor

Payment to an incapacitated person: is valid only if the incapacitated person kept the thing delivered of insofar as it was
beneficial to him

C. THING TO BE PAID OR DELIVERED

Delivery of a Specific Thing
Delivery of a Generic Thing
Obligations to do or not to do
Legal tender
Negotiable Instruments and
Checks
Extraordinary Inflation or Deflation
 Cannot compel to receive a different one
 Cannot demand a thing of superior quality
 Cannot deliver a thing of inferior quality
 Cannot be substituted by another against the obligee’s will
 P1 coin and above – not exceeding P2,000
 Coins below P1 – not exceeding P200
 Not considered as a legal tender
 Acceptance is dependent on creditor
 Value of the currency at the time of the establishment of the obligation

D. PLACE OF PAYMENT
Place of Payment
1. Place designated
2. Wherever the thing might be at the moment the obligation was constituted
3. Domicile of the debtor
4. If debtor changes, the additional his domicile in bad faith expenses shall be borne by him

SPECIAL FORMS OF PAYMENT

 Delivery of transmission of ownership to the creditor
Dation in Payment
 Governed by the Law on Sales
“Dacien in Pago”
 Obligations may be totally extinguished
 Only one debtor; several debts, debts are the same kind, only one and the same creditor
 Debtor has the right to apply the payment
 If not designated
1. Most onerous
2. Applied proportionately

Requisites:
Application of Payment
1. There must be two or more debts.
2. The debts must be of the same kind.
3. The debts are owed by the same debtor to the same creditor
4. All debts are due, except:
 When the parties have stipulated that payment may be applied to a debt not yet due.
 When the application is made by the party for whose benefit the term has been
constituted.
 Deliver all his properties for the purpose of selling and applying the proceeds to settle the
obligation
 Obligations is extinguished up to its proceeds
 Supposes financial difficulty on the part of the debtor
Payment by Cession or
Assignment
Kinds of Payment by Cession
1. Voluntary or conventional – agreed upon by the parties
2. Legal – operated by law

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 Requisites:
1. There must be two or more creditors.
2. The debtor is insolvent.
3. The debtor abandons all his property except those which are except from execution.
4. The creditor accept the abandonment.
 Offering the payment; does not extinguish the obligation
Tender of Payment  It is a PREPARATORY ACT to consignation and in itself DOES NOT extinguish the
obligation
 Deposit of the object of the obligation in a competent court
 After the tender of payment has been refused

Requisites:
Consignation 1. There exists a valid debt that is due.
2. There is a legal cause to payment.
3. There is a previous notice to consign to the persons having interest in the fulfilment of
the obligation
4. The amount or thing due is deposited in court

Withdrawal of the Thing Deposited:

Withdrawal as a matter of right: debtor withdraws before acceptance by the creditor or before judicial declaration of propriety
of consignation. In this case, no extinguishment yet of the obligation. As such, no revival since the obligation has not been
extinguished to begin with.

Withdrawal after acceptance or declaration: only with the consent of the credtor. In this case, the obligation is revived. As
such, creditor can no longer run after the guarantor, unless the latter consented. This is because the obligation has been
extinguished. The revival will not revive the guaranty.

2. Loss of the thing due

 Goes out of commerce, perishes or disappears
 If happened during the existence of the obligation, extinguish it.
 If happened after the existence of the obligation, it is void.

Partial Loss – may be determined by the court as so important to extinguish the obligation.
Test – the obligation is extinguished if the parties would have not been entered into the obligation without the thing that have
been lost.

Presumptions of fault: Whenever the thing is lost in the possession of the debtor, it shall be presumed that the loss was
due to his fault, unless there is proof to the contrary.

Impossibility of Performance: Loss of the thing may likewise cover impossibility of performance, e.g., a debtor is obliged
to paint a building and the building was destroyed (physical impossibility) or a law took effect making the obligation illegal
(legal impossibility).

When: In impossibility, the law should take effect, or the impossibility happened DURING the existence of the obligation so
as to extinguish it. If the law took effect or the impossibility arose BEFORE the existence of the obligation, the obligation is
void.

Impossibility of Performance
 As to nature: a. Physical Impossibility b. Legal Impossibility
 As to impossibility refers
a. Objective – impossibility of the act or service itself without considering the person of the debtor
b. Subjective – impossibility refers to the fact that the act or service can no longer be done by the debtor
but may still be performed by another person.
 As to extent: Partial or Total
 As to period of impossibility: Permanent or Temporary

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3. Condonation / Remission of the debt
 Forgiveness of an indebtedness
 Act of liberality
 By virtue without receiving any
 Extinguished its entirety or in the part or aspect of the same to which the remission refers

Kinds of Condonation or Remission

1. As to amount or extent
 Total – the total obligation is remitted
 Partial – only a part of obligation or only the accessory obligation is remitted
2. As to form
 Express – one made orally or in writing.
 Implied – one inferred from the conduct of the parties
3. As to manner of remission
 Inter vivos – during the lifetime of the creditor
 Mortis causa – will take effect upon the death which must be in done through is will

4. Confusion or Merger
 The person is both the creditor and debtor of the same obligation

Requisites:
a. Must take place between the credit and the principal debtor.
b. Must involve the very same obligation.
c. Must be total.

Guarantors:
Merger which takes place in the person of the principal debtor or creditor benefits the guarantors.
Confusion which takes place in the person of any of the latter does not extinguish the obligation. Which means, if the debt is
assigned by the creditor to the guarantor, and the latter becomes the creditor of such obligation, there is no extinguishment,
because he is NOT the principal debtor of the obligation.

5. Compensation
 Concurrent amount
 Reciprocally creditors and debtors of each other

Kinds of Compensation
1. As to amount or extent
 Total – debts are of the same amount
 Partial – debts are of different amounts

2. As to cause or origin
 Legal – takes place by operation of law and extinguishes both debts to the concurrent amount
 Voluntary or conventional – takes place by agreement of the parties
 Judicial or set off – compensation ordered by the court
 Facultative – compensation that may be claimed or opposed by one of the parties

Requisites:
a. Parties must be mutual principal debtors and creditors in their own right.
b. Both debt must be due.
c. Both debts must be liquidated and demandable.
d. Debts must pertain to sums of money or if consumable, they must be of the same kind and quality
e. The claim must be clearly demandable.

When compensation may not be proper:

1. Depositum – as to the depositary
2. Bail – as to the bailee
3. Support – as to the one giving support
4. Civil liability arising from a Penal Clause

Several debts susceptible of compensation: the rules on the application of payments shall apply to the order of
compensation.
Legal compensation: takes effect by operation of law, and extinguishes both debts to the concurrent amount, even
though the creditors and debtors are not aware of the compensation.

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6. Novation
 Modification or extinguishment of an obligation by another

Requisites:
1. Previous valid obligation
2. Agreement of all parties to a new contract
3. Extinguishment of old obligation
4. Validity of the new obligation

Kinds of Novation
1. As to nature
a. Real or objective – changing the object or principal condition
b. Personal or subjective – change of the parties
I. Substituting the person of the debtor
i. Expromission – third person initiates the substitution and assumes the obligation even without the
knowledge or against the will of the debtor
ii. Delegacion – the debtor initiates the substitutions
II. Subrogating a third person in the rights of the creditor
i. Conventional – change of creditor by the agreement of the parties
ii. Legal – operation by law
c. Mixed – change of objects and parties to the obligation

2. According to form
a. Express – declared in unequivocal terms
b. Implied – old and new obligation are on every point incompatible with each other

3. According to extent
a. Total or extinctive – old obligation is totally extinguished
b. Partial or modificatory – old obligation still remains in force

Subjective Novation:
1. Active (SUBROGATION) – if a third person is subrogated to the rights of the creditor
2. Passive (SUBSTITUTION) – if a third person is substituted to the person of the debtor

KINDS OF PASSIVE EXTENT OF LIABILITY OF OLD DEBTOR IN CASE OF

NOVATION
Expromision – without
knowledge or consent of the
original debtor
Delegacion – with consent of the
original debtor.
Parties:
Delegante – the old debtor
Delegado – the new debtor
Delegatorio – the creditor
REIMBURSEMENT INSOLVENCY OF NEW DEBTOR
Old debtors is no longer liable
Beneficial
Reimbursement
Old debtor may still be liable if the insolvency was
already existing and of public knowledge or
known to the debtor.
Full Reimbursement

Creditor's consent - the creditor's consent is necessary for there to be a novation in the person of the debtor.

Objective or Real Novation

1. Change in the object
2. Change in the principal conditions of the obligation, which may either be:
a. Express - when so expressed in unequivocal terms;
b. Implied - the old and the new obligations be on every point incompatible with each other.

Accessory obligations: General Rule: extinguished as a consequence of novation.

Exception: insofar as pour atrui is concerned and the third person for whose benefit the obligation was constituted did not
give his consent.

Conditional Obligations: 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.

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