Special forms of payment
of payments by the creditor
1. Application of payment or
imputation of payment
2. Cession of payment or
assignment
3. Dation in payment
4. Tender of payment and
consignation
Article 1252 (Application of
Payment)
"He who has various debts of the
same kind in favor of one and the same
creditor, may declare at the time of
making the payment, to which of them
the same must be applied. Unless the
parties so stipulate, or when the
application of payment is made by the
party for whose benefit the term has
been constituted, application shall not
be made as to debts which are not yet
due.
If the debtor accepts from the creditor
a receipt in which an application of the
payment is made, the former cannot
complain of the same, unless there is
a cause for invalidating the contract"
Application of payment - designation
of the debt to which should be applied
when payment is made by a debtor
who owes several debts in favor of the
same creditor.
Requisites of application of
payments by the debtor
● There must be one debtor and
one creditor
● There must be two or more
debts
● The debts must be of the same
kind
● All the debts must be due
● The payment is not be enough to
extinguish all the debts
Requisites for a valid application
● The debtor did not make any
designation on which debt
should be paid when he made
the payment;
● The creditor issued a receipt
expressing the application of the
payment to a particular debt.
● The debtor agreed to the
application of the payment to a
particular debt.
Limitation of the
preferential right of the
debtor to choose the debt to
be paid.
● The debtor cannot apply to a
debt not yet liquidated or due;
● If the creditor is given a benefit
of the period or term, which has
not yet arrived, an application of
payment cannot be made by the
debtor;
● If there is a specific agreement
as to which debts shall be paid
first, the debtor cannot vary the
agreement without the consent
of the creditor;
● If there is principal obligation
which bears interests, the debtor
cannot pay the interest without
first paying the principal;
● A debtor cannot choose to pay a
bigger debt partially, when the
payment made can be applied
as full payment to a smaller
debt.
Scenarios:
1. The debtor was the one who
made the application of the
payment
2. The creditor was the one who
made the application of the
payment
3. By operation of Law
● Both debtor and creditor did not
apply the payment
● Someone applied the payment
but it is invalid
THE APPLICATION OF PAYMENT IS
INVALID IF THE CONSENT OF THE
DEBTOR IS DONE THROUGH
FRAUD, ERROR, OR VIOLENCE.
Note:
● Once the application of payment
is made, it is NOT revocable
UNLESS the parties AGREE.
However, even if both parties
agree, the revocation won’t be
allowed if there is a third person
that would be prejudiced.
Example:
D owes C as follows:
(a) P1,500.00 payable on
September 5;
(b) P1,200.00 payable on
September 20;
(c) A specific table worth
P2,000.00 to be delivered on
September 20; and
(d) P1,000.00 payable on
October 15.
On September 20, D paid C
P1,500.00.
D may apply the P1,500.00 to debt (a),
or to debt (b) and (if C does not object)
to a portion of debt (a). If D paid only
P1,000.00, he cannot choose to apply
his payment to the P1,500.00 debt
because C cannot be compelled to
receive partial payment. D cannot
properly apply his payment to debt (c)
because it is not of the same kind. He
must deliver the thing agreed upon.
Neither can he apply it to debt (d) which
is not yet due unless there is a
stipulation to the contrary or he has the
benefit of the period. An application of
payment made by the debtor without
objection from the creditor is binding
upon the latter. His acquiescence
(consent) is equivalent to an agreement
and has the force and efficacy of a
contract.
Art. 1253 (FOR PARTIAL
PAYMENT ONLY)
"If the debt produces interest, payment
of the principal shall not be deemed to
have been made until the interests
have been covered".
Note:
● The debtor cannot apply his first
payment to the principal,
UNLESS the creditor waived his
right.
What interests are covered?
● Interest from delay is NOT part
of obligation. It is an
independent liability arising from
non-perf.
● Applies to compensatory
interest (stipulated as earnings
of the amt. due under the obl.)
● Interest from default arises bcos.
of non-perf. by the debtor.
Example:
Arthur was granted a loan by a bank,
but failed to settle. 6 mos. ago,
somebody sent him a msg. tru
Facebook demanding to collect over
₱200,000. He attempted to negotiate.
The bank agreed to process his loan for
a max. amnesty if he has consistently
paid ₱10,000 a mo. for 6 mos. After 6
mos., they gave him the amt. w/c they
said contains the max. amnesty and it
still showed over ₱200,000. His
monthly payment is deducted fr. the int.
and pen. but NOT on the prin. Unless
he has an agrmt. that the payments he
made were to be applied to the prin.,
the Art. 1253 will apply.
Article 1254 (BY OPERATION OF
LAW)
"When the payment cannot be applied
in accordance with the preceding rules,
or if application cannot be inferred from
other circumstances, the debt which is
most onerous (burdensome) to the
debtor, among those due, shall be
deemed to have been satisfied. If the
debts due are of the same nature and
burden, the payment shall be applied to
all of them proportionately".
Example of more onerous debt:
● An interest-bearing debt than a
non-interest bearing debt
● A debt as a sole debtor than as
a solidary debtor
 ● Older debts
● Debts secured by a mortgage or
by pledge
● An obligation with a penal
clause.
RULES IN CASE NO
APPLICATION OF PAYMENT HAS
BEEN VOLUNTARILY MADE
1. Apply to the most onerous debts
2. If debts are of the same nature
and burden, application shall be
made to all, proportionately.
Example of application of payment
proportionately:
Debts: (1) 1,200,000 (2) 600,000
Payment (without application by the
debtor: 300,000
Solution:
(1) 300,000 x (1,200,000/1,800,000) =
200,000 outstanding debt is
1,000,000
(2) 300,000 x (600,000/1,800,000) =
100,000 outstanding debt is 500,000
Art. 1255 Cession of Payment or
Assignment
"The debtor may cede or assign his
property to his creditors in payment of
his debts. This cession, unless there is
stipulation to the contrary, shall only
release the debtor from responsibility
for the net proceeds of the thing
assigned. The agreements which, on
the effect of the cession, are made
between the debtor and his creditors
shall be governed by special laws".
Cession of Payment or
Assignment
Cession or assignment in favor of
creditors is another special form of
payment. It is the assignment or
abandonment of all the properties of
DATION IN PAYMENT vs. CESSION IN PAYMENT
Dation Cession
There is usually only one creditor
the debtor for the benefit of his creditors
in order that the latter may sell the
same and apply the proceeds thereof to
the satisfaction of their credits.
● ita-transfer ang lahat ng
properties ni debtor sa mga
creditors, and creditors may sell
them.
REQUISITES:
1. There must be two or more
creditors;
2. The debtor must be insolvent;
3. The assignment must involve all
the properties of the debtor;
4. The cession must be accepted
by the creditors.
EFFECTS:
Unless there is a stipulation to the
contrary,
1. The assignment does not make
the creditors the owners of the
property of the debtor
2. The debtor is released from his
obligation only up to the amount
of the net proceeds of the sale of
the property assigned. Unless
there is stipulation to the
contrary, the balance remains to
be collectible.
Note:
● This provision talks about a
voluntary or contractual
assignment.
● The creditors do not become the
owners of the properties, they
were just given the authority to
sell them. If the ownership was
transferred to the creditors, it will
be the same as DATION IN
PAYMENT.
There are several creditors
Does not presuppose the insolvency of Debtor is insolvent at the time of insolvency of the
the debtor or a situation of financial debtor or a assignment
difficulties.

Dation does not involve all the property of Extends to all the property of the property of the
the debtor debtor subject to execution

The creditor becomes the owner of the The creditors only acquire the of the thing given
thing given by the debtor by the debtor right to sell the thing and apply the
proceeds to their credits pro rata (in proportion)

Art. 1256 (TENDER OF PAYMENT X owes Y 1,000,000 due today, and Y

AND CONSIGNATION)
"If the creditor to whom tender of
payment has been made refuses without
just cause to accept it, the debtor shall be
released from responsibility by the
consignation of the thing or sum due.
Consignation alone shall produce the
same effect in the following cases:
(1) When the creditor is absent or
unknown, or does not appear at the place
of payment;
(2) When he is incapacitated to receive
the payment at the time it is due; (pwede
lang ‘to kapag walang legal
representative si incapacitated creditor)
(3) When, without just cause, he refuses
to give a receipt;
(4) When two or more persons claim the
same right to collect;
(5) When the title of the obligation has
been lost.".
Tender of payment
- the act, on the part of the debtor, of
offering to the creditor the thing or
amount due.
Consignation
- the act of depositing the thing or amount
due with the proper court when the
creditor cannot accept or refuses to
accept payment.
Example:
refuses to accept the payment for no
reason at all. X must deposit the money
in court.
Note:
● The refusal to accept must be
unjustified.
Tender of payment must be:
1. In legal tender
2. Include interest
3. Unconditional
Note:
● The tender of payment must be
prior to the consignation. The
tender of payment must be proved
by the debtor in a proper case.
● If the consignation is made LATE,
the interest should run.
Art. 1257.
"In order that the consignation of the
thing due may release the obligor, it must
first be announced to the persons
interested in the fulfillment of the
obligation.
The consignation shall be ineffectual if it
is not made strictly in consonance with
the provisions which regulate payment"

3. Prior notice of consignation

Essential requisites of 4. Actual consignation
Consignation 5. Subsequent notice of
consignation
1. Existence of a valid debt
2. Valid prior tender, unless tender Note:
is excused
 ● Prior and subsequent notice are
important. If these two were not
done, the consignation is VOID.
Art. 1258.
"Consignation shall be made by
depositing the things due at the
disposal of judicial authority, before
whom the tender of payment shall be
proved, in a proper case, and the
announcement of the consignation in
other cases.
The consignation having been made,
the interested parties shall also be
notified thereof".
Art. 1259
"The expenses of consignation, when
properly made, shall be charged
against the creditor"
Art. 1260
"Once the consignation has been duly
made, the debtor may ask the judge to
order the cancellationof the obligation.
BEFORE the creditor has accepted the
consignation, or before a judicial
declaration that the consignation has
been properly made, the debtor may
withdraw the thing or the sum
deposited, allowing the obligation to
remain in force "
Note:
● The obligation will remain in
force because the debtor
withdraws it.
● The debtor will bear the
expenses under this provision.
● If the creditor has accepted the
consignation or the court has
already declared it to be proper,
the debtor has no right to order
cancellation UNLESS there is a
consent from the creditor.
How can the creditor prevent the debtor
from exercising the right to withdraw
the consigned?
● BY IMMEDIATELY
ACCEPTING THE
CONSIGNATION.
What is the effect when the
consignation was improperly made?
1. The obligation remains
2. Consignation would produce no
effect.
Art. 1261
"If, the consignation having been made,
the creditor should authorize the
debtor to withdraw the same, he shall
lose every preference (priority) which
he may have over the thing. The co-
debtors, guarantors and sureties shall
be released."
Example:
X owes Y 1,000,000 due today and Z is
the guarantor. Y refuses to accept the
payment for no reason at all. X made a
proper consignation. Before the
acceptance and declaration of the
consignation, X withdraws it with the
consent of Z. Later on, X became
insolvent. Can Y proceed against Z?
NO, the guarantor shall be released.
LOSS
There is a Loss
● when the object perishes
● goes out of commerce
● disappears in such a way that its
existence is unknown
● cannot be recovered
There is impossibility of
performance
● physical impossibility
● legal impossibility
Art. 1262. Loss of Specific Thing
"An obligation which consists in the
delivery of a determinate thing shall be
extinguished if it should be lost or
destroyed without the fault of the
debtor, and before he has incurred in
delay.
When by law or stipulation, the
obligor is liable even for fortuitous
events, the loss of the thing does not
extinguish the obligation, and he shall
be responsible for damages. The same
rule applies when the nature of the
obligation requires the assumption of
risk."
General Rule:
Loss of Specific Thing = Obligation
Extinguished
Exceptions:
1st Par. Art. 1262 - Debtor is in default
2nd Par. Art. 1262
● Law
● Stipulations in the Contract
● Nature of Obligation requires
Assumption of Risk
Examples when the law requires
liability even in the case of fortuitous
event:
● Debtor is in default
● Debtor promise to deliver the
same thing to two or more
persons who do not have the
same interest.
● Obligation arises from a crime.
Art. 1263. Loss of Generic Thing
"In an obligation to deliver a generic
thing, the loss or destruction of
anything of the same kind does not
extinguish the obligation "
● Principle "genus never perishes"
Exception:
Delimited Generic
Example:
X obliged himself to deliver to Y 100
sacks of rice from his December 20x2
harvest which is a delimited generic
thing. However, nagkaroon ng typhoon
which completely destroyed the harvest
of X. The obligation, therefore, is
extinguished because it is no longer
possible to deliver the object. The
obligation will be converted into
monetary obligation.
Note:
● Dapat delimited para ma-
extinguished.
Art. 1264.
"The courts shall determine whether,
under the circumstances, the partial
loss of the object of the obligation is so
important as to extinguish the
obligation."
● This provision talks about the
effect of partial loss of a specific
thing
● And it answers the question
when is partial loss considered
as Total loss??
Loss is so significant
Example: (Partial loss)
Loss of the body of a pen
Note:
● When the loss is so material and
the remaining portion of the
object is insignificant or
immaterial, partial loss of the
thing may be considered as
total.
● It is the court who is given the
discretion in case of
disagreement of both parties.
Art. 1265
"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, and without prejudice to the
provisions of article 1165.
This presumption does not apply in
case of earthquake, flood, storm, or
other natural calamity".
Note:
● Presumption LANG.
Art. 1266 "Loss" or impossibility
of performance in personal
obligations
"The debtor in obligations to do shall
also be released (note: from liability)
when the prestation becomes legally or
physically impossible without the fault
of the obligor. "
 ● Impossibility must exist after the
constitution of the obligation
Example:
(1) X obliged himself to construct a
commercial building for Y. A week after,
X dies. The obligation of X has
become physically impossible,
therefore, the obligation is
extinguished.
(2) X obliged himself to construct a
commercial building for Y. However,
the government refuses to give building
permit because the area has been
declared by law as a residential zone.
The obligation of X has become
legally impossible, therefore, the
obligation is extinguished.
Art. 1267.
"When the service has become so
difficult as to be manifestly beyond the
contemplation of the parties, the obligor
may also be released therefrom, in
whole or in part. "
Note:
● This is an exception to obligatory
force of contract.
Example:
The duty to construct a road kaso
nagkaroon nang malakas na
earthquake so as to change the
condition of the land to the point that
such construction was possible but
very dangerous to drive and build a
property.
Note:
● One party must ask for release.
Art. 1268. Effect of Loss, in
criminal offenses.
"When the debt of a thing certain and
determinate proceeds from a criminal
offense, the debtor shall not be
exempted from the payment of its price,
whatever may be the cause for the loss,
unless the thing having been offered by
him to the person who should receive it,
the latter refused without justification to
accept it.”
Note:
● with or without the fault of the
debtor, he is liable.
Example:
X stole the car of Y. X is ordered to
return the car. Before delivery,
nagkaroon ng sunog sa bahay ni X.
(1) Is X’s obligation extinguished? NO,
because the obligation to deliver the
car arose from a criminal offense.
(2) Supposed, before the fire, X
tendered the car but Y refused to
accept. Is the obligation to deliver
extinguished? YES, because the
creditor is in default (mora
accipendi).
(3) What should X do if Y refuses to
accept? X has an option to CONSIGN
the thing to the court or keep it in his
position until delivered to Y but
needs to exercise the diligence of a
good father of a family
Art. 1269 Right of the creditor to
proceed against a third person.
"The obligation having been
extinguished by the loss of the thing,
the creditor shall have all the rights of
action which the debtor may have
against third persons by reason of the
loss.”
Example:
X obliged himself to deliver to Y a
specific watch. However, Z stole the
watch and lost it. According to Article
1268, Y has the right to proceed
(sue) against Z.
Art. 1270 Condonation or
Remission
"Condonation or remission is
essentially gratuitous and requires the
acceptance by the obligor. It may be
made expressly or impliedly.
One and the other kind shall be subject
to the rules which govern inofficious
donations. Express condonation shall,
furthermore, comply with the forms of
donation.”
Condonation - it is a gratuitous
abandonment by the creditor of his
right.
Example:
X owed Y 1,000,000 payable in
December 2020. In December 2020, Y
told X that he doesn’t need to pay Y the
1,000,000 since she is condoning it.
The obligation was extinguished
through condonation.
The requisites of Remission
1. It must be gratuitous;
2. It must be accepted by the
obligor
3. The parties must have capacity
4. It must not be inofficious
(excessive, this can be reduced
by the court)
5. If made expressly, it must
comply with the forms of
donation
Kinds of Remission
As to its extent:
1. Complete
2. Partial
As to its form:
1. Express (verbal, written)
2. Implied (conduct)
As to its date of effectivity:
1. Inter vivos (will take effect during
the life time of the donor)
2. Mortis causa (will take effect
upon the death of the donor, eg.
last will and testament)
Art. 1271
"The delivery of a private document
evidencing a credit, made voluntarily by
the creditor to the debtor, implies the
renunciation of the action which the
former had against the latter.
If in order to nullify this waiver it should
be claimed to be inofficious, the debtor
and his heirs may uphold it by proving
that the delivery of the document was
made in virtue of payment of the debt. "
● Presumption in case document
of indebtedness is voluntarily
delivered by creditor
What is the Effect of the delivery of
private documents evidencing the
credit?
- creates presumption of implied
remission (should be voluntary)
Note:
● Presumption can be overcome
by showing proof to the contrary
Example:
X issues a PN in favor of Y in an
amount of 1,000,000. Later on, Y
delivered the PN back to X without
collecting the 1,000,000. X is (again) in
possession) of the 1M PN because Y
VOLUNTARILY delivered the PN and
did not collect it. In this case, there is
a presumption of implied
remission/condonation. This is just
a presumption. Y can still prove that
she has a different intention as to
why she delivered the PN back to X.
Art. 1272 Presumption of
voluntary delivery
"Whenever the private document in
which the debt appears is found in the
possession of the debtor, it shall be
presumed that the creditor delivered it
voluntarily, unless the contrary is
proved"
Art. 1273
"The renunciation of the principal debt
shall extinguish the accessory
obligations;
but the waiver of the latter shall leave
the former in force."
● Accessory follows the principal.
● Principal obligation will still exist
even without the accessory
obligations
Example:
X owed Y 1M, and Z is the guarantor.
In this case, the principal debt is 1M.
The accessory obligation is the
obligation of Z as a guarantor because
as a guarantor, she will be liable.
(1) If Y renounced the principal (1M),
the accessory will also be extinguished.
(2) If Y renounced the accessory, the
obligation of Z will be the ONLY one
extinguished. The obligation of X will
remain in force.

Art. 1274
"It is presumed that the accessory
obligation of pledge has been remitted
when the thing pledged, after its
delivery to the creditor, is found in the
possession of the debtor, or of a third
person who owns the thing."
Example:
X borrowed 1M from Y, and as a
guarantee, X also delivered his watch
worth 1M. Later on, if the watch was
returned to the possession of X, there
is a presumption that Y remitted the
accessory obligation which was
pledged.
Note:
● Only the accessory obligation of
pledge is presumed remitted.
Art. 1275 Confusion or
Merger
"The obligation is extinguished from the
time the characters of creditor and
debtor are merged in the same person.”
Confusion - is the meeting in one
person of the qualities of the creditor
and debtor with respect to the same
obligation.
Requisites of confusion
1. It must take place between the
principal debtor and creditor;
2. It must be complete and definite.
3. The very obligation involved
must be the same or identical.
Example:
X owes Y 100k. X executed a
negotiable instrument (PN) in favor of
Y. Y endorsed the PN to Z. Later on,
bought goods from the store of X and
instead of paying cash, Z endorsed the
PN to X. In this case, X owes himself
because the PN was returned to him.
He became the debtor and the creditor
at the same time. Consequently, X’s
obligation is extinguished because
of merger or confusion.
Usual Causes of Confusion
● Succession
● Donation
● Negotiation of a negotiable
instrument (most common)
Art. 1276 Effect of Merger on
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"
Example:
(1) X owes Y 1M, and Z is the
guarantor. Y assigned the credit to A.
Later on, A assigned the credit to X. In
this case, the obligation was
extinguished and Z was released as a
guarantor. Nagkaroon ng merger sa
mismong principal obligation.
(2) X owes Y 1M, and Z is the
guarantor. Y assigned the credit to A.
Later on, A assigned the credit to Z. In
this case, the contract of guarantee is
extinguished but the principal obligation
of X to Y still remains.
What is the effect of merger and
confusion?
1. Obligation is extinguished (if the
merger and confusion is valid)
2. If there is a guarantor and the
merger is in the principal debtor,
the obligation is extinguished
and the guarantor is released.
3. If there is a guarantor, and the
merger is not on the principal
debtor but only on the guarantor,
the principal obligation is not
extinguished but the accessory
is extinguished.
Art. 1277 Merger in Joint
Obligations
"Confusion does not extinguish a joint
obligation except as regards the share
corresponding to the creditor or debtor
in whom the two characters concur."
Example:
(1) X and Y jointly owe Z 1M, evidenced
by a PN. If Z endorsed the PN to A, and
A endorsed it again to Y, the share of Y
is extinguished BUT the share of X still
remains.
(2) X and Y solidary owes Z 1M,
evidenced by a PN. If Z endorsed the
PN to A, and A endorsed it again to Y,
the entire obligation is extinguished. Y
has a right to demand reimbursement
from X.
Note:
● In joint obligations, the debts are
distinct and separate from each
other.
Art. 1278 Compensation
"Compensation shall take place when
two persons, in their own right, are
creditors and debtors of each other."
Compensation - is the extinguishment
to the concurrent amount of the debts
of two persons who, in their own right,
are reciprocally principal debtors and
creditors of each other.
Example:
X owes Y 1,0000. Y owes X 700.
Assuming both debts are due and
payable today. The compensation
(partially) takes place immediately by
operation of law to the concurrent
amount of 700. X shall be liable to Y
for 300.

Confusion vs. Compensation

Confusion Compensation

One person Two persons

One obligation Two obligations

Payment vs. Compensation

Payment Compensation
takes effect by act of the parties takes effect by operation of law
the parties must have the free it is not required that the parties have
disposal of the thing due and the capacity to give or to receive, as the
capacity to alienate case may be

it is necessary that it be complete the law permits partial extinguishment

of the obligation

Kinds of Compensation compensation. However, X cannot

1. By its effect or extent: force Y to pay her debt since Y’s debt
is still not demandable.
● Total
● Partial

2. By its cause or origin: Art. 1279 Requisites of Legal

Compensation
● Legal "In order that compensation may be
● Conventional or voluntary proper, it is necessary:
(mutual consent) (1) That each one of the obligors be
● Judicial bound principally, and that he be at the
● Facultative same time a principal creditor of the
other;
Example: (Facultative) (2) That both debts consist in a sum of
X owes Y 1M demandable and due on money, or if the things due are
December 15, 2020. In another consumable, they be of the same kind,
transaction, Y owes X 1M demandable and also of the same quality if the latter
on or before December 30, 2020. On has been stated;
December 15, Y who is given the (3) That the two debts be due;
benefit of a term, can claim
(4) That they be liquidated and
demandable;
(5) That over neither of them there be
any retention or controversy,
commenced by third persons and
communicated in due time to the
debtor."
REQUISITES OF
COMPENSATION
1. The parties are principal debtors and
creditors of each other.
Example:
(1) X owes Y 10k. Y owes X 10k.
Compensation will take place because
X & Y are the principal debtors and
creditors of each other.
Example (if they are not the principal
debtors and creditors of each other:
(1) X owes Y 10k, guaranteed by Z. In
another transaction, Y owes Z 10k.
There will be no compensation
between Y and Z although Y is
principally liable to Z, Z is merely
subsidiarily liable to Y because she has
no debt to Y. No compensation may
apply.
2. Both debts consist in a sum of
money, or of consumable things of the
same kind and quality.
Example:
X obliged himself to deliver to Y 10
sacks of rice. On the other hand, Y
obliged herself to de9liver to X 10 sacks
of corn. In this case, compensation
will not take place because the
obligation of the two are
consumable things but not the same
kind or quality.
3. The two debts are due or
demandable.
● Due - period has arrive or
condition has been fulfilled
● Demandable - no debts has
prescribed, debts are valid and
legal
Example:
X owes Y 1M payable on December 25,
2020. Y owes X 1M payable on
December 30, 2020. Can there be a
legal compensation on December 25,
2020? WALA PA, ngunit maaaring
magkaroon ng voluntary
compensation upon agreement.
4. The two debts are liquidated
● Debts can already be
determined or ascertained
Example:
X owes Y 10k. Y owes X share in the
business, the amount is still not
determined. Compensation will not take
place because the debt of Y to X is not
liquidated. If part of the debt of Y has
been liquidated, compensation takes
place with respect to the part without
waiting for the liquidation of the entire
obligation.
5. No retention or controversy has been
commenced by a third person
Example:
X owes Y 1M. Y owes X 1M, she (Y)
also owes Z 1M. The credit has been
garnished by beauty who claims to be
an unpaid creditor. Compensation
cannot take place between X and Y
because there is a controversy which is
commenced by Z (she filed
garnishment proceedings). In the mean
time, the compensation is
SUSPENDED.
Art. 1280 Compensation benefits
guarantors
"Notwithstanding the provisions of the
preceding article, the guarantor may
set up compensation as regards what
the creditor may owe the principal
debtor.
● Extinguishment of the obligation
carries with it the accessory
obligation.
Example:
X owes Y 1M, Z is the guarantor. In
another transaction, Y owes X 300k.
When Y ask for the payment of X, X
cannot Y. How much will Z pay as the
guarantor of X? Z will be liable for 700k
only. She can set up the 300k credit of
X as the basis for partial compensation.
Art. 1281.
"Compensation may be total or partial.
When the two debts are of the same
amount, there is a total compensation.”

Art. 1282 Voluntary
Compensation
"The parties may agree upon the
compensation of debts which are not
yet due.”
Note:
● Requisites under Article 1279 is
not applicable in this article.
● This compensation has no
special requisites.
● It is sufficient that an agreement
which declares compensation is
valid.
Art. 1283 Judicial Compensation
or Set-off
"If one of the parties to a suit over an
obligation has a claim for damages
against the other, the former may set it
off by proving his right to said damages
and the amount thereof.”
Note:
● All the requisites under Art. 1279
must also be present.
Exception:
● At the time of pleading, the claim
is not yet liquidated
Art. 1284 Compensation of
Rescissible or Voidable Debts
"When one or both debts are
rescissible or voidable, they may be
compensated against each other
before they are judicially rescinded
(revoked, canceled) or avoided."
Example:
X owes Y 1M. Consequently, through
fraud, X was able to make Y sign a PN
that Y has also a debt to X amounted to
1M. In this case, the liability of X to Y is
still valid. However, the debt of Y to X is
voidable because her consent was
obtained through fraud.
(1) Before the debt of Y to X is annulled,
both debts are valid. If both debts are
valid, compensation will take place.
(2) Supposedly, Y filed a case to nullify
her debt to X, and the court annulled
the debt of Y and decided in favor of Y,
X would still be liable. The effect of the
annulment is retroactive as if there
had been no compensation.
Art. 1285 Effects of Assignment
on Compensation
"The debtor who has consented to the
assignment of rights made by a creditor
in favor of a third person, cannot set up
against the assignee the compensation
which would pertain to him against the
assignor, unless the assignor was
notified by the debtor at the time he
gave his consent, that he reserved his
right to the compensation.
If the creditor communicated the
cession to him but the debtor did not
consent thereto, the latter may set up
the compensation of debts previous to
the cession, but not of subsequent
ones.
If the assignment is made without the
knowledge of the debtor, he may set up
the compensation of all credits prior to
the same and also later ones until he
had knowledge of the assignment."
● Under the law, pag lahat ng
requisites for legal
compensation are present,
compensation takes effect by
operation of law, and so, both
debts, are extinguished to the
concurrent amount, kahit pa nga
si debtor and creditors are not
aware of the compensation.
Hence, compensation actually
takes place automatically. Pag
the parties in their own right
become the debtor and creditor
of each other and if lahat ng
requisites under Art. 1279 ay
present, Compensation takes
place.
Exception to said rule:
● When the assignment was made
WITH THE CONSENT of the
debtor.
● Consent operates as a waiver of
the rights to compensation
Exception to the exception:
 ● When at the time he gave his
consent, he RESERVED his
right to the compensation.
Effect of Assignment on
Compensation
● The assignment may be made
with the consent of the debtor
● Compensation cannot be set up,
dahil meron ngang consent and
so, therefore a waiver of the
compensation.
● Exception to the exception: if the
right to the compensation is
reserved.
Example:
X owes Y 1,000,000 due yesterday. Y
owes X 300k due also yesterday. Both
debts are extinguished automatically
up to the amount of 300k since the
amount are not the same. Hence, the
debt of X becomes 700k as of today.
However, later on, Y assigned her
credit to Z. The assignment that Y
made in favor of Z is with the consent
of X. How much can Z collect from X?
Z can collect 1M from X. X cannot set
up the defense of compensation
before he consent to the
assignment.
Take note:
If Pogi gave his consent to the
assignment before it was made or
subsequently, pareho lang, Article
1285 1st par applies, Pogi still loses the
right to set up the defense of
compensation. But he can still collect
the P300,000.00 owed by Ganda
naman. In other words, the
compensation shall be deemed not to
have taken place
● Assignment was made with the
knowledge but without the
consent or against the will of the
debtor
● Compensation can be set up
regarding debts previous to the
assignment
Example:
X owes Y 1M due on December 1. Y
owes X 1.5M due on December 5. In
another transaction, X owes Y 500k
due on December 15. X assigned his
right to Z on December 10. X notified Y
but Y did not give her consent to the
assignment. How much can Z collect
from Y?
Answer:
(1) Y can set up the compensation of
debts previous to the assignment.
Hence, Y can raise the defense of
compensation with respect to the Dec.
5 debt which was before the
assignment happened.
(2) Z can collect only 500k because
compensation takes place between the
Dec. 1 & 5 debts. But, Y cannot raise
the defense of compensation with
respect to the debt of X to the Dec. 15
debt.
● The assignment may be made
without the knowledge of the
debtor.
● Debtor can set-up compensation
as a defense for all debts
maturing PRIOR to his
knowledge of the assignment.
● The crucial time here is the time
of knowledge of the assignment,
hindi yung time of assignment
itself.
Example:
X owes Y 1M due on December 1. Y
owes X 1.5M due on December 5. In
another transaction, X owes Y 500k
due on December 15. X assigned his
right to Z on December 10 without the
knowledge of Y. Y learned about the
assignment on December 25. In this
case, Y can set up compensation of
credits to all of the debts since all of the
debts mentioned have already
matured.
Art. 1286
"Compensation takes place by
operation of law, even though the debts
may be payable at different
different places, but there shall be an
indemnity for expenses of exchange or
transportation to the place of payment.”
Note:
 ● This article applies to legal
compensation.
● Whoever claims compensation,
he will bear the expenses of
exchange and transportation.
Example:
X owes Y $1,000 payable in New York.
Y owes X ₱100k payable in Manila. If X
claims compensation, he must pay for
the expenses of exchange of money.
Art. 1287 Legal Compensation
cannot take place
"Compensation shall not be proper
when one of the debts arises from a
depositum or from the obligations of a
depositary or of a bailee in
commodatum.
Neither can compensation be set up
against a creditor who has a claim for
support due by gratuitous title, without
prejudice to the provisions of paragraph
2 of article 301"
1. When one debt arises from a
depositum.
Example:
X deposited 100 sacks of rice valued at
100k to Y. X owes Y 1M. When X
withdraws his 100 sacks of rice from Y,
Y refuses to deliver. She is claiming
compensation. Is Y allowed to
compensate? No, this is an obligation
arising from deposit, compensation
shall not be proper.
Example:
X deposited 100k in his bank. Later on,
he acquired a loan of 10k. Can the bank
set up compensation? Yes, deposits
in bank are actually governed by a
contract of loan, not a contract of
deposit.
2. When one debt arises from
commodatum.
● Commodatum is a gratuitous
contract whereby one of the
parties delivers to another
something not consumable so
that the latter may use the same
for a certain time and return it.
Example:
Y borrowed the car of X. X owed Y 1M.
Later on, Y cannot refuse to return the
car of X on the ground of compensation
because no compensation can take
place when one of the debts arises from
a commodatum.
3. When one debt arises from a claim
for support due by gratuitous title.
Example:
Papa is the father of Baby, a minor, who
under the law is entitled to be supported
by Papa. Now Baby owes Papa
P50,000.00. Papa cannot compensate
for his obligation to support Baby by
what Baby owes him because the right
to receive support cannot be
compensated. Hindi pwedeng sabihin
ni Papa kay Baby a 'In as much as you
owe me P50,000.00, I will not pay your
allowance for one year.’
Art. 1288 Non-compensation if
one debt arises from a crime
"Neither shall there be compensation if
one of the debts consists in civil liability
arising from a penal offense.”
Example:
Pogi owes Ganda 10,000.00. Later on,
nag-away si Ganda at Pogi, at sa away
nila, dahil magaling si Ganda, she has
inflicted physical injuries against Pogi.
Dahil dyan, Pogi filed a case against
Ganda, and the court rendered
judgement in favor of Pogi against
Ganda, and ordered Ganda to pay Pogi
10,000, applying the principle "a person
criminally liable is also civilly liable".
Note: Ganda has no right to set up
compensation. However, Pogi, the
offended party, can set up
compensation.
Art. 1289.
"If a person should have against him
several debts which are susceptible of
compensation, the rules on the
application of payments shall apply to
the order of the compensation.”
Example:
If X owes Y 1k without interest which is
due today. He also owes Y 1k with 6%
interest due today. Y also owes X 1k
due today. However, neither of the two
applied for the payment. Most onerous
debt applies. In this case, the second
debt is the most onerous and will be
compensated. X still has a debt of 1k
without interest.

Art. 1290 Effect of Merger on

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