CHAPTER IV: EXTINGUISHMENT OF

OBLIGATIONS
Prepared By:
Brigino, Renel Justine C.
Rodiño, John Edmund T.
Zafra, Crislee Mae
CHAPTER IV: EXTINGUISHMENT OF
OBLIGATIONS
Section 4⸻ Confusion or Merger of Rights
 CONFUSION or MERGER OF RIGHTS (ART.
1275) The obligation is extinguished from the time the characters of creditor and debtor
are merged in the same person.(1192a)

• It is the meeting in one person of the qualities of

creditor and debtor with respect to the same
obligation.
REQUISITES OF CONFUSION
1. It must take place between the principal debt
and creditor.
2. It must be complete.
 EFFECT OF MERGER IN THE PERSON OF PRINCIPAL
DEBTOR OR CREDITOR (ART. 1276)
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.

• Merger in the person of the principal debtor or creditor

extinguishes the obligation. Hence, the accessory
obligation of guaranty is also extinguished in
accordance with the principal that the accessory
follows the principal.
 EFFECT OF MERGER IN THE PERSON OF GUARANTOR (ART.
1276)
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.

• The extinguishment of the accessory obligation does

not carry with it that of the principal obligation.
Consequently, merger, which takes place in the person
of the guarantor, while it extinguishes the guaranty,
leaves the principal obligation in force.
 CONFUSION IN A JOINT OBLIGATION (ART.
1277)
Confusion does not extinguish a joint except as regards the share corresponding to the
creditor or debtor in whom the two characters concur.

• Confusion taking place in the person of any debtor or

creditor does not affect others. In the other words, the
confusion will extinguish only the share corresponding
to the creditor or debtor in whom the two characters
concur.
 CONFUSION IN A SOLIDARY OBLIGATION

• Merger in the person of one of the solidary debtors

shall extinguish the entire obligation because it is also
a merger in the other solidary debtors. In a solidary
obligation, there is only one obligation and every
debtor is individually responsible for the payment of
the whole obligation. He who makes payment may
claim reimbursement from his co-debtors for the
shares which correspond to them.
CHAPTER IV: EXTINGUISHMENT OF
OBLIGATIONS
Section 5⸻ Compensation
 Compensation (ART. 1278)
Compensation shall take place when two persons, in their own rights, are creditors and
debtors of each other.

• It is the extinguishment to the concurrent amount

of the debts of two people who, in their own
right, are debtors and creditors of each other.
Kinds of Compensation

A. BY ITS EFFECT OR EXTENT (ART. 1281)

1. Total Compensation
-when both of the obligations are of the same
amount and are entirely extinguished.
2. Partial Compensation
-when the two obligations are of different
amounts and a balance remains. The extinctive
effect of compensation will be partial only as
regards the larger debt or in other words, there
is partial compensation of the larger debt.
 Kinds of Compensation

B. BY ITS CAUSE OR ORIGIN

1. Legal Compensation(ART. 1279, 1286, & 1290)
-when it takes place by operation of law even without the knowledge of
the parties.
2. Voluntary or Conventional Compensation(ART. 1282)
-it includes any compensation which takes place by the agreement of the
parties even if all the requisites for legal compensation are not present.
This kind of compensation has no special requisites. It is sufficient that
the contract of the parties, which declares the compensation.
-the agreement or contract which declares the compensation should
itself be valid; thus among other things, the parties must have legal
capacity and must freely give their consent.
- this provision of law is an exception to the general rule that only debts
which are due and demandable can be compensated.
3. Judicial Compensation or Set-off(ART. 1283)
-when it takes place by order from a court in litigation.
Strictly speaking, judicial compensation is merely a
form of legal or voluntary compensation when
declared by the courts by virtue of an action by one of
the parties, who refuses to admit it, and by the
defense of the other who invokes it.
-a party may set-off his claim for damages against his
obligation to the other party by proving his right to
said damages and the amount thereof.
-this must be pleaded and proven; it can be made
effective only by an order from the court.
4. Facultative Compensation(ART. 1287 & 1288)
-when it can be set up only by one parties. One of the
parties has the choice of claiming the compensation
or of opposing compensation.
 REQUISITES OF LEGAL COMPENSATION (ART. 1279) (1) That each
one of the obligors be bound principally, and that he be at the same time a principal creditor of the other:
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also
of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demand.
(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated
in due time to the debtor.

(1) The parties are principal creditors and principal debtors of

each other.
(2) Both debts consist in a sum of money, or of consumable
things of the same kind and quality.
(3) The two debts are due and demandable
-GENERAL RULE: If one of the debts is not yet due, there can
be no compensation.
-EXCEPTION: The parties may agree upon the compensation
of debts which are not yet due. In which case, the compensation
becomes conventional or by agreement of the parties.
Requisites of Legal Compensation

(4) The two debts are liquidated

(5) No retention or controversy commenced by
a third person.
-this is a negative requisite. The other such
requisite is that the compensation is not
prohibited by law. Of course, compensation will
not take place where there is waiver.
 Legal Compensation

LEGAL COMPENSATION WHERE DEBTS PAYABLE AT DIFFERENT

PLACES (ART. 1286)
– The indemnity contemplated above does not refer to the
difference in the value of the things in their respective
places but to the expenses of monetary exchange (in
case of money debts) and expenses of transportation (in
case of things to be delivered). Once there expenses are
liquidated, the debts also become compensable. The
indemnity shall be paid by the person who raises the
defense of compensation.
 Legal Compensation
INSTANCES WHEN LEGAL COMPENSATION IS NOT ALLOWED BY LAW
(1) Where one of the debts arises from DEPOSITUM (ART. 1287)
-this is actually facultative compensation. Here depositor has the option
to claim or not to claim compensation.
(2) Where one of the debts arises from a COMMODATUM (ART 1287)
-this is actually facultative compensation. Here the lender has the option
to claim or not to claim compensation.
(3) Where one of the debts arises from a claim for support due by gratuitous
title (ART 1287)
-support in arrears may be compensated but not future support.
(4) Where one of the debts consists in civil liability arising from a penal
offense (ART 1288)
-if one of the debts consists in civil liability from a criminal offense,
compensation would be improper and inadvisable because the satisfaction
o such obligation is imperative.
-this is another case of facultative compensation on the part of the
victim. The criminal cannot claim compensation but the victim may claim
 Other Rules in Compensation
COMPENSATION BENEFIT GUARANTOR (ART. 1280)
-this is an exception to the rule that only the principal debtor
can set up as against his creditor what the latter owes him.
Although the guarantor is only subsidiary liable, not principally
bound, he is given the right to set up compensation. The reason is
that the extinguishment of the principal obligations such as a
consequence of compensation carries with it the accessory
obligations such as guaranty.
COMPENSATION OF RESCISSIBLE OR VIODABLE DEBTS (ART. 1284)
- rescissible and voidable obligation are valid until they are
judicially rescinded or annulled. Prior to rescission or annulment,
the debts may be compensated against each other.
-to void unfairness, if rescission or annulment is later on
decreed by the court, it is as if NO compensation ever took place.
The decree thus acts retroactively.
Other Rules in Compensation

RULES TO ASSIGNMENT (ART. 1285)

A. WHEN DEBTOR CONSENT TO ASSIGNMENT
-the assignment of the credit of ther creditor
may be made with the consent of the debtor. In
consenting to the assignment, the right to the
compensation is waived by the debtor. The rule
applies whether the consent to the assignment was
before or after the debts become compensable. In
other words, when there is consent compensation
shall be deemed not to have taken place.
EXAMPLE:
A owes B P3,000.00 due yesterday.
B owes A P1,000.00 due also yesterday.
Both debts are extinguished up to the amount of P1,000.00.
Hence, A still owes B P2,000.00 today.
Not, if B assigns his right to C, the latter can collect only
P2,000.00 from A.
However, if A gave his consent to the assignment before it
was made or subsequently (par. 1.), A loses the right to set up
the defense of compensation. So A will be liable to C for
P3,000.00 but he can still collect the P1,000.00 owed by B. In
the other words, the compensation shall be deemed not to
have taken place.
EXAMPLE:B. When
A owes B P3,000.00 due November 15.
B owes A P1,000.00 due November 15.
B assigned his right to C on November 1 with the
consent of A.
On November 15, A cannot set up against C, the
assignee, the compensation which would pertain to him
against B, the assignor. In other words, A is liable to C for
P3,000.00 but he can still collect the P1,000.00 debt of B.
However, if A, while consenting to the assignment,
reserved his right to the compensation, he would be
liable only for P2,000.00 to C. (par. 1.)
 Other Rules in Compensation

B. WHEN COMPENSATION HAS TAKEN PLACE BEFORE ASSIGNMENT

AND DEBTOR IS AWARE BUT DOES NOT CONSENT TO ASSIGNMENT
-when compensation takes place by operation of law, the debts are
extinguished to the concurrent amount. If subsequently, the
extinguished debt is assigned by the creditor to a third person with the
knowledge but without the consent or against the will of the debtor,
the debtor can raise or set up the defense of compensation against the
third person (assignee) regarding debts pervious to the cession or
assignment. This refers to debts maturing before the assignment, that
is, before the NOTICE, hence here, legal compensation has already
taken place. The remedy of the assignee is against the assignor.
EXAMPLE:
A owes B P1,000.00 due November 1.
B owes A P2,000.00 due November 10.
A owes B P1,000.00 due November 15.
A assigned his right to C on November 12. A notified B but the latter did
not give his consent to the assignment. How much can C collect from B.
B can set up the compensation of debts on November 10 which was
before the cession on November 12. (par.2.) There being partial
compensation, the assignment is valid only up to the amount of P1,000.00.
But B cannot raise the defense of compensation with respect to the
debt of A due on November 15 which has not yet matured. So, on
November 12, B is liable to C for P1,000.00. Come November 15, A will be
liable for his debt of P1,000.00 to B.
 Other Rules in Compensation

C. WHEN COMPENSATION HAS TAKEN PLACE

BEFORE ASSIGNMENT AND DEBTOR HAS NO
KNOWLEDGE OF THE ASSIGNMENT
-the assignment may be made without the
knowledge of the debtor. The debtor can set up
compensation as a defense for all debts maturing
prior to his knowledge of the assignment whether
the debts matured before or after the assignment.
The crucial time here is the time of knowledge of
the assignment, not the time of assignment itself.
EXAMPLE:
In proceeding example, let us suppose That the
assignment was made without the knowledge of B who
learned of the assignment only on November 16.
In this case, B can set up the compensation of
credits before and after the assignment. The crucial
time is when B acquired knowledge of the assignment
and not the date of the assignment. If N learned of the
assignment after the debts had already matured, he
can raise the defense of compensation; otherwise, he
cannot.
EXAMPLE:
A owes B P1,000.00 due November 1.
B owes A P2,000.00 due November 10.
A owes B P1,000.00 due November 15.
A assigned his right to C on November 12. A notified B but the latter did
not give his consent to the assignment. How much can C collect from B.
B can set up the compensation of debts on November 10 which was
before the cession on November 12. (par.2.) There being partial
compensation, the assignment is valid only up to the amount of P1,000.00.
But B cannot raise the defense of compensation with respect to the
debt of A due on November 15 which has not yet matured. So, on
November 12, B is liable to C for P1,000.00. Come November 15, A will be
liable for his debt of P1,000.00 to B.
Other Rules in Compensation

RULES ON APPLICATION OF PAYMENTS APPLY TO

ORDER OF COMPENSATION (ART. 1289)
-compensation is similar to payment. If a
debtor has various debts which are susceptible of
compensation, he must inform the creditor which
of them shall be the object of compensation. In
case he fails to do so, then the compensation shall
be applied to the most onerous obligation.
CHAPTER IV: EXTINGUISHMENT OF
OBLIGATIONS
Section 6⸻ Novation
 Novation

-it is the total or partial extinction of an obligation through the

creation of a new one which substitutes it.
-the substitution or change of an obligation by another, which
extinguishes or modifies the first, either by changing its object or
principal conditions, or by substituting another in place of the debtor,
or subrogating a third person in the rights of the creditor.

KINDS OF NOVATION
(1) According to how it is constituted
A. EXPRESS
-when so declared in unequivocal terms.
B. IMPLIED
-when the old and new obligation are essentially incompatible with
each other.
(2) According to extent or effect
A. TOTAL or EXTINCTIVE
-when the old obligation is completely extinguished.
B. PARTIAL or MODIFICATORY
-when the old obligation is merely modified, i.e., the change is
merely incidental to the main obligation. The original obligation
still remains in force except insofar as it has been modified.
(3) According to the subject
A. REAL or OBJECTIVE
-when the object or cause of principal conditions of the
obligation are changed.
B. PERSONAL or SUBJECTIVE
-when the person of the debtor is substituted and/or when a
third person is subrogated in the rights of the creditor.
 Kinds of personal or subjective novation
A. PASSIVE NOVATION
-substituting the person of the debtor.
Kinds of Passive Novation or Substitution
i. EXPROMISION
-that which takes place when a third person of his own initiative and without
knowledge or against the will of the original debtor assumes the latter’s obligation with the
consent of the creditor.
ii. DELEGACION
-that which takes place when the creditor accepts a third person to take the place of
the debtor at the instance of the latter.
B. ACTIVE NOVATION
-subrogating a third person in the rights of the creditor.
Kinds of Active Novation or Subrogation
i. LEGAL SUBROGATION
-that which takes place by operation of law.
ii. CONVENTIONAL or VOUNTARY SUBROGATION
-that which takes place by agreement of the parties.
C. MIXED
-when the object and/or principal conditions of the obligation and the debtor or the
creditor, or both the parties, are changed. It is a combination of real and personal novations.
Requisites of Novation
(1) PREVIOUS VALID OBLIGATION

Effect where the old obligation is void or is voidable (ART. 1298)

-if the old obligation is void or non- existent, there is nothing to

novate.
-if the old obligation is voidable, nvation is still possible provided the
obligation has not yet been annulled. If the original obligation is
ratified, it can be novated.

(2) CAPACITY AND INTENTION OF THE PARTIES TO MODIFY OR

EXTINGUISH THE OBLIGATION

Novation is not presumed (ART. 1292)

-novation is never presumed. It must be clearly and unmistakably
established either by express agreement of the parties or acts of
equivalent import or by the incompatibility of the two obligations with
 Requisites of Novation

(3) THE MODIFICATION OR EXTINGUISHMENT OF THE OBLIGATION

- the extinguishment or modification itself is a result of novation.

(4) THE CREATION OF A NEW VALID OBLIGATION

Effect where the new obligation is void (ART. 1297)

-GENERAL RULE: If the new obligation is void, the original one shall subsists.
-EXCEPTION: Unless the parties intended that the former relation should be
extinguished in any event.

Effect where the new obligation is voidable

-if the new obligation is voidable, novation can take place. IF the obligation
has been annulled, the old obligation subsists, and whatever novation has taken
place will naturally have to be set aside unless the parties stipulate otherwise.
Passive Novation
Kinds of Passive Novation or Substitution
A. EXPROMISION (ART. 1293)
-where the initiative comes from a third
person. It logically requires the consent of the
third person and the creditor.
- it is essential that the old debtor be released
from his obligation ; otherwise, there is no
expromision.
B. DELEGACION
-the initiative comes from the debtor himself.
In delegacion, all the parties must agree.
-the old debtor must be released from the
 Passive Novation
RIGHT OF NEW DEBTOR WHO PAYS
(1) In expromision, payment by the new debtor gives him the right to beneficial reimbursement
under the second paragraph of ART. 1236.
(2) If the payment was made with the consent of the original debtor and on his own initiative
(delegacion), the new debtor is entitled to reimbusement and subrogation under ART. 1237.

EFFECT OF NEW DEBTOR’S INSOLVENCY OR NON- FULFILLMENT OF THE OBLIGATION

(3) In Expromision (ART. 1294)
-in exprimision, the new debtor’s insolvency or non-fullfilment of the obligation will not revive
the action against he old debtor whose obligation is extinguished by the assumption of the debt by
the new debtor.

(2) In Delegacion (ART. 1295)

a. If the non-fulfillment of the obligation is due to causes other that insolvency, the old debtor is
not liable.
b. In case of insolvency:
GENERAL RULE: If the insolvency of the new debtor occurred only after the delegation, the old
debtor is not liable.
EXCEPTIONS TO GENERAL RULE: in this case the old debtor is liable.
i. The said insolvency was already existing and
of public knowledge (although it was not
known to the old debtor) at the time of the
delegacion.
ii. The insolvency was already existing and
known to the debtor (although it was not
public knowledge) at the time of the
delegacion.
 Active Novation
Kinds of Active Novation or Subrogation (ART. 1300)
(1) LEGAL SUBROGATION
-it is not presumed except in case expressly provided by law.
(2) CONVENTIONAL OF VOLUNTARY SUBROGATION
-it must be clearly established in order that it may take place.
-requires the consent of the original parties and of the third person (ART. 1301)

CASES OF LEGAL SUBROGATION (WHEN LEGAL SUBROGATION IS PRESUMED) (ART.

1302)
(2) When a creditor pays another creditor who is preferred even without the
debtor’s knowledge
(3) When a third person, not interested in the obligation, pays with the express or
tacit approval of the debtor
(4) 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.
Effects of Legal Subrogation (ART. 1303)
-the effect of legal subrogation is to transfer to
the new creditor the credit and all the rights and
actions that could have been exercised by the former
creditor either against the debtor or against third
persons, be they guarantors or motgagors.

Effect of Partial Subrogation (ART. 1304)

-the creditor to whom partial payment has been
made by the new creditor remains a creditor to the
extent of the balance of the debt. In case of
insolvency of the debtor, he is given a preferential
right under this article to recover the remainder as
 Other Rules in Novation
Effect of Novation on Accessory Obligations (ART. 1296)
GENERAL RULE: Extinguishment of the principal obligation carries with its
extinguishment of the accessory obligation such as pledges, mortgages and
guaranties.
EXCEPTION: It may be agreed that despite the extinguishment of the old
obligation, the accessory obligation would still remain provided that the debtors
of said accessory obligation give their consent.
EXCEPTION: In case of an accessory obligation created in favor of a third person
(stipulations pour autrul) which remains in force unless said third person gives his
consent to the novation because a person should not be prejudiced by the act of
another without his consent.

Presumption where Original Obligation Subject to a Condition (ART. 1299)

GENERAL RULE: The conditions attached to the old obligation are also attached
to the new obligation.
GENERAL RULE: If there is a contrary stipulation.