Extinguishment of Obligations

 Causes of Extinguishment of
obligations:
1. Payment or performance
2. Loss of the thing due
3. Condonation or remission of the debt Done

4. Confusion or merger of rights of creditor

and debtor
5. Compensation
6. Novation Today
7. Annulment
8. Rescission
9. Fulfillment of resolutory condition
10. Prescription
11. Other causes
 Compensation
Coverage of Discussion:
•Concept
•Kinds of Compensation
•Compensation when one or both debts are rescissible
•Compensation when the debts are payable at
different places
•Rule on application of payment to apply when there
are several debts susceptible of compensation
•Effect of assignment on compensation of debts
•Compensation in solidary obligation
Compensation, concept:
Shall take place when two persons, in their own
right, are creditors and debtors of each other.
It is mode of extinguishing obligations whereby two
persons in their capacity as principals are mutual
debtors and creditors of each other with respect to
equally liquated and demandable obligations to
which no retention or controversy has been timely
commenced and communicated by third parties.
◦ Example: D owes C 5,000. C owes D 5,000. Both debts
are due and demandable. The parties do not need to pay
each as their obligations are extinguished by
compensation.
Kinds of compensation
 As to amount or extent
◦ Total – when the debts are of the same amount.
◦ Partial – when the debts are of different amounts
 As to cause or origin
◦ Legal - this takes place by operation of law and
extinguishes both debts to the concurrent amount even
though the debts are payable at different places and the
creditors and debtors are not aware of the
compensation
 Legal compensation operates even against the will of the
interested parties and even without their consent.
 “ipso jure (which means “by law itself”)
Requisites:
◦ That each one of the obligors be bound principally, and
that he be at the same time a principal creditor of the
other.
 A. D owes C 5,000. C owes D 5,000. Legal compensation takes
place because D and C are principal debtors and creditors of each
other.
 B. D owes C 5,000 with G as guarantor. C owes G 5,000. Legal
Compensation may not take place between D and C because while D
is a principal debtor of C, C is not even a debtor of D. Legal
compensation may not take place between G and C because although
C is a principal debtor of G, G is only a subsidiary debtor of C.
 Exception to first requisite
 A guarantor may set up compensation as regards what the
creditor may owe the principal debtor.
 D owes C 5,000 with G as guarantor. C owes D 4,000. On due
date, C demands payment from D but D no longer has any
assets so C goes after G. G may set up compensation up to
4,000 so C can collect from him 1,000 only.
◦ That both debts consist in a sum of money or
if the things due or consumable, they be of the
same kind, and also of the same quality of the
latter has been stated.
 The term “consumable” actually refers to things
that are fungible or capable of substitution. Thus,
there can be legal compensation is “ D is obliged to
give C a fountain pen and C is obliged to give D a
fountain pen”, since the objects, being generic, are
fungible although not consumable.
 However, there can be no legal compensation is “D
is obliged to give C a specific Parker fountain pen
and C is obliged to give D a specific Cross fountain
pen”, because the objects are not capable of
substitution.
◦ That the two debts are due
 The maturity date of both debts must have arrived for legal
compensation to take place. Here, it is not required that both
debts have the same due date.
◦ That both debts be liquidated and demandable
 “Liquidated” means the amount of the debts has already been
determined or is easily determinable. On the other hand,
“demandable” means both debts must be enforceable, so if one
of them has prescribed, legal compensation cannot take place.
◦ That over neither of them there be any retention or
controversy commenced by third persons and
communicated in due time to the debtor.
 D owes C 10,000. C owes D 10,000. C also owes X 10,000.X
sues C and asks the court to order D not to pay C so that in the
event the court renders judgment in favor of X, D will have to
pay X. The court issues the order to D. There can be no legal
compensation between D and C because there is an order of
retention to D with respect to his debt to C.
 Voluntary or conventional – this takes place by
agreement of the parties, such as when they agree to the
compensation of debts which are not yet due.
◦ D owes C 5,000 due on September 20, 2020, while C owes D 5,000
due on September 30, 2020. On September 1, 2020, for instance, D
and C may agree that their debts compensated.
 Judicial (or set-off) – this is compensation ordered by
the court. In Art. 1283, if one of the parties to a suit over
an obligation has a claim for damages against the other,
the former may set off by proving his right to said
damages and the amount thereof.
◦ T, a travel agent, sued P for collection of 10,000 representing the
balance of P for a guided tour in Bangkok which T arranged. In his
answer, P claimed that T owed him damages amounting to 10,000
which he (P) and his family sustained as a result of the substandard
hotel accommodations that T booked for them. P was able to prove
his right to said damages and the amount thereof. Any compensation
declared by the court in this case is one of judicial compensation.
Facultative– this is a compensation that may
be claimed or opposed by one of the parties
(such as when not all the requisites for legal
compensation are present)
◦ D owes C 5,000 which is due and payable on
September 1, 2020, while C owes D 5,000 which is
due and payable on or before September 30, 2020.
On September 1, 2020, C may claim compensation
because he was given the benefit of the period, i.e.,
he may choose to pay on or before September 30,
2020. Should D claim compensation on September
1, 2020, C has the right to oppose it because he
cannot be compelled, although he may opt to pay.
Before September 30, 2020.
Following are instances of facultative
compensation (because legal
compensation cannot take place):
◦ When one of the debts arises from a deposit.
 C is a depository of D’s ring. Previously, D made a
promise to give a ring to C. If D demands the return
of ring he deposited with C, C cannot refuse to
return it by claiming that D owes him a ring.
However, if C demands the delivery of a ring from
D as D had promised, D may, at his option, set off
the claim of C against his own claim for the return
of the ring he deposited with C.
 When one of the debts arises from the obligations of
a bailee in commodatum.
◦ C borrowed D’s bicycle. D has a promise to give a bicycle
to C. If D demands the return of the bicycle he lent to C, C
cannot refuse to return it by claiming that D owes him a
bicycle. However, if C demands the delivery of a bicycle
from D as D has promised, D may, at his option set off the
claim of C against his own claim for the return of the
bicycle that he loaned to C.
 When one of the debts arises from a claim for
support by gratuitous title.
◦ H, husband, was ordered by the court in a case of legal
separation to give a monthly support of 20,000 to W, his
wife. H has not yet given the amount to W for the present
month. On the other hand, W owes H 20,000 by way of
loan. W may claim compensation but not H.
 When one of the debts consists in civil liability
arising from a penal clause. Here, the offended
party may claim compensation but not the
offender.
◦ D owes C 50,000 by way of loan. One day, C
intentionally rammed his jeep on the fence of D,
causing damages thereon amounting to 50,000. C was
charged and convicted of the crime of malicious
mischief. He was ordered to pay D 50,000 for the
damages on the fence. If D demands the payment of
such damages, C cannot claim compensation on the
ground that D owes him 50,000 by way of loan.
However, if C demands the payment of the loan from
him, D may claim compensation by offsetting it
against his claim for damages against C.
Compensation when one or both debts
are rescissible or voidable
When one or both debts are rescissible or
voidable, they may be compensated
against each other before they are
judicially rescinded or avoided.
Compensation when the debts are
payable at different places
Compensation takes place by operation of
law, even though the debts may be
payable at different places, but there shall
be indemnity for expenses of exchange or
transportation to the place of payment
Rule on application of payment t apply when there are
several debts susceptible of compensation
D owes C the following debts on account of various
merchandise purchases while he made from the store
of a: 3,000 due on March 1, 2020; 3,000, sue on March
15, 2020; 3,000 due on March 31, 2020; and 3,000,
due on April 15, 2020. C, on the other hand, owes D
3,000 sue on April 5, 2020. On April 5, 2020, D may
claim compensation for any of the debts due on March
1, March 15 and March 31. If it does not designate the
debt to which compensation shall apply, the right to
apply is shifted to C, and if C also fails to avail himself
of the right, compensation shall be applied
proportionately to the three debts due at 1,000 each.
Effect of assignment on compensation of
debts
When the assignment was with the debtor’s consent,
he cannot set up against the assignee the
compensation that would pertain to him against the
assignor unless he reserved his right to the
compensation.
◦ D owes C 20,000 due on March 15. C owes D 8,000 due
on March 10. On March 12, C assigned his credit right to
T with the consent of D. On March 15, T can collect from
D 20,000, but D can collect 8,000 from C. If D reserved
his right to the compensation that would pertain to him
against C amounting to 8,000 when he consented to the
assignment, then T can collect only 12,000 from him (D).
Ifthe debtor was notified of the assignment
but he did not give his consent thereto, the
debtor may set up compensation of debts
maturing before the assignment but not of
subsequent ones
◦ D owes C 20,000 due on March 15. C, on the other
hand, owes D the following debts; 8,000 due on
March 1; 3,000 sue on March 8; and 5,000 on
March 14. On March 12, C assigned his credit
right to T with notice to D but D did not give his
consent to the assignment. In this case, T may
collect from D 9,000 because D can set up
compensation with respect to the debts due on
March 1 (8,000) and March 8 (3,000) which had
already matured at the time of the assignment.
Ifthe assignment was without knowledge of the
debtor, he can set up compensation of all debts
maturing before the time he obtains knowledge
of the assignment.
◦ D owes C 20,000 due on March 25. C, on the other
hand, owes D the following debts; 8,000 due on
March 1, 3,000 due on March 8; 5,000 due on March
14; and 2,000 due on March 31. On March 12, C
assigned his credit right to T without the knowledge
of D. On March 16, D learned of the assignment. In
this case, T may collect from D 4,000 because D
may set up compensation with respect to the debts
due on March 1 (8,000), March 8 (3,000), and March
14 (5,000), which debts have become due as of
March 16 when D learned of the assignment.
Compensation in solidary obligation
A is indebted to X, Y and Z, solidary
creditors, for 30,000 due on June 1, 2020. X
in turn owes A 30,000 due on June 1, 2020.
Both obligations being due, they are
extinguished by compensation. However, X
has to give Y and Z their respective shares at
10,000 each because compensation made by
any of the solidary creditors shall render him
liable to the others for the share in the
obligation corresponding to them.
Compensation
1. Takes effect by operation of law
2. Capacity to give and to acquire not
necessary
Compensation
1. Two persons who are mutual
creditors of each other
2. There must be at least two
obligations
Payment
1. Takes effect by action of the parties
2. Capacity to give and to acquire
essential
Confusion
1. One person where qualities of
debtor and creditors are merged
2. Only one obligation