Chapter 5 – EXTINGUISHMENT OF OBLIGATION extinguished considering that there was no complete

delivery.
Obligations are extinguished: (Art. 1231)
Example: Manuel is indebted to Paul in the amount
(1) By payment or performance: of P100,000.00 payable on December 15, 2021. On
(2) By the loss of the thing due or impossibility of due date, Manuel offered to pay only P50,000.00.
performance: Paul can refuse to accept payment because of
(3) By the condonation or remission of the debt; incomplete payment. As such, the obligation
(4) By the confusion or merger of the rights of remains.
creditor and debtor,
(5) By compensation; Effect of substantial performance in good faith
(6) By novation. (Art. 1234)
Other causes of extinguishment of obligations, are If the obligation has been substantially performed in
annulment, rescission, fulfillment of a resolutory good faith, the obligor may recover as though there
condition, and prescription. had been a strict and complete fulfillment, less
damages suffered by the obligee.
The enumerations are note exclusive. This means
that there are other causes that will result in the It is well to note, however, that substantial
extinguishment of an obligation. Such as the mutual performance in good faith applies only when an
desistance or withdrawal of the parties in an action. obligor admits breaching the contract after honestly
In a personal obligation the death of a party therein and faithfully performing all the material elements
will result to extinguishment of an obligation. thereof except for some technical aspects that cause
no serious harm to the obligee.
1. BY PAYMENT OR PERFORMANCE (Art. 1232)
Requirements of substantial compliance
Payment as a mode of extinguishment of an
obligation is not limited to the act of delivering money In order that there may be substantial performance of
but also performance, such as doing an act. an obligation, there must have been:

Delivering of money: 1. An attempt in good faith to perform, without

any willful or intentional departure therefrom;
Example: Pedro is indebted to Juan the amount of 2. The deviation from the obligation must be
P5,000.00 to be paid on Jan. 20, 2020. If Pedro pays slight, and the omission or defect must be
Juan by delivering to the latter the said amount, the technical and unimportant.
obligation of Pedro is extinguished.
The party claiming substantial performance must
Performance of an act: show that he has attempted in good faith to perform
his contract, but has through oversight,
Example: Jose was commissioned to paint the gate misunderstanding or any excusable neglect failed to
of Mara. Once the gate was fully painted, Jose's completely perform in certain negligible respects, for
obligation is extinguished. which the other party may be adequately indemnified
Payment or performance must be complete (Art. by an allowance and deduction from the contract
1233) price or by an award of damages.

In order that debt is considered paid, the thing or Conversely, the principle of substantial performance
service in which the obligation consists must be is inappropriate when the incomplete performance
completely delivered or rendered. Otherwise stated, constitutes a material breach of the contract.
partial performance or partial payment will not result A contractual breach is material if it will adversely
into the extinguishment of an obligation. affect the nature of the obligation that the obligor
Example: Jose obliged to deliver 20 sacks of rice to promised to deliver, the benefits that the obligee
Tin. However, Jose only delivered 5 sacks of rice. expects to receive after full compliance, and the
Here, Jose's obligation is not extinguished because extent that the non-performance defeated the
she did not perform completely his obligation. purposes of the contract.

Example: Maica obliged herself to deliver 10 boxes Example: Maica obliged herself to deliver 10 boxes
of Coke in can to Jocel on Jan. 20, 2020. On the of C2 Green Tea to Jocel on Jan. 20, 2020. On the
date of delivery however, Maica was able to produce date of delivery however, Maica was able to produce
only 5 boxes. In this case, Maica's obligation is not 9 boxes only. Maica is eager to deliver 10 boxes,
however, she failed to do so for reason beyond her debt. This was made with the knowledge
control. of Randy. Dondy accepted the payment.
In this case, considering that Maica is in good faith, In this case, Erick shall have the right to
she is deemed to have performed substantially her collect the whole amount of P10,000.00
obligation to Jocel. from Randy. Aside from this, Erick can
exercise the rights then available to
As a consequence, Jocel is under obligation to pay Dondy, such as the right to demand
Maica but for the 9 boxes of C2 Green Tea light only. payment from the guarantor Jude.
Effect of acceptance by the creditor of 2. On the other hand, if the payment of the third
incomplete and irregular performance by the person was made without the knowledge or
debtor (Art. 1235) against the will of the debtor, the third person
has only the following rights:
If the creditor accepts an incomplete or irregular a. The third person may only recover from
compliance of the obligation without any protest or the debtor in so far as the payment has
objection. the creditor is already estopped or been beneficial to the debtor.
prevented from demanding further compliance of the
obligation. In which case, the debtor's obligation is Example: Randy is indebted to Dondy the
deemed fulfilled. amount of P10,000.00. Erick, a stranger,
offers to Dondy to pay Randy's debt. But
Payment made by third person, effect (Art. 1236 – this was made without the knowledge of
Art. 1237) Randy. Dondy accepted the payment.
The creditor is not precluded if he wants to accept Unknown, however, to Erick, Randy
payment from third person but he cannot be obliged actually made already a partial payment
by third person to accept payment. Otherwise stated, amounting to P5,000.00. How much can
the creditor has the right to refuse payment made by Erick recover from Randy?
third person. The reason being that a third person is
not a party to the contract. Considering that the payment made by
Erick was without the knowledge of
However, once the payment of third person has been Randy, and since the latter already made
accepted by the creditor, it would have the following a partial payment, Erick cannot collect the
effects: entire amount of P10,000.00 from Randy.
1. If the payment of the third person was made Erick can only claim P5,000.00. This is so
with the knowledge or consent of the debtor: because third person may only recover
a. the third person shall have the right to from the debtor in so far as the payment
claim reimbursement from the debtor of has been beneficial to the debtor if it was
what he has paid; made without the knowledge of the
Example: Randy is indebted to Dondy debtor.
the amount of P10,000.00. Erick, a
stranger, offers to Dondy to pay Randy's Effect of payment made by third person who
debt, this was however with the does not intend to be reimbursed (Art. 1238)
knowledge of Randy. Dondy accepted the When third person pays the debt of the debtor to the
payment. In this case, Erick shall have creditor but said third person has no intention to be
the right to collect the whole amount of reimbursed from the debtor, it is considered a
P10,000.00 from Randy as donation, in which case the debtor must give his
reimbursement. consent. If the creditor accepted the payment, the
b. the third person shall have the right of obligation is extinguished.
subrogation. Subrogation means the act
of putting somebody into the shoes of the Example: Patrick is indebted to Jolord in the amount
creditor, hence, enabling the former to of P5,000.00 which is due on December 25, 2020.
exercise all the rights and actions that Patrick's friend Mark learned of this. Mark
could have been exercised by the latter. volunteered to pay Patrick's debt without any
intention to be reimbursed. Patrick gave his approval
Example: Randy is indebted to Dondy the to pay his debt. Here, the payment made by Mark
amount of P10,000.00, Jude is the who does not intend to be reimbursed is deemed a
guarantor of Randy. Erick, a stranger donation. Thus, on December 25, 2020, Mark went
offers to Dondy that he will pay Randy's
to Jolord and paid the debt of Patrick. The payment the whole amount in good faith. Thereafter, the
was accepted by Jolord. parents of Jocel learned of the sale. May the parents
of Jocel recover the whole P20,000.00 from Jolord?
In this case, the payment made by Mark who does
not intend to be reimbursed is considered a donation. No, the parents can no longer recover the said
On the other hand, the acceptance of Jolord of the amount considering that Jolord had already spent the
payment will have the effect of extinguishment of the money in good faith. This is clear under Article 1427
obligation of Patrick. to the effect that there shall be no right to recover the
money if the same has already been spent by the
Effect of payment made by person who has no creditor in good faith.
free disposal of the thing and capacity to alienate
(Art. 1239) To whom should payment be made (Art. 1240)
Free disposal of the thing due means that the 1. The creditor; Payment as a mode of
property delivered should not be subject to any claim extinguishing an obligation must be delivered
by, or encumbrances in favor of third persons. While to:
capacity to alienate, means that the debtor is not 2. His successor in interest; or
disqualified to enter into a contract. 3. To any person he authorized to receive it.
(Art. 1241)
Simply stated, a person has the capacity to transfer Example: Marta owes Jose the amount of
property or ownership if he is capable of giving P20,000.00. In this case Marta should deliver
consent. the payment to Jose, the creditor, or to a
Under the law, the person who makes payment must person authorized by Jose to receive it. In
have both free disposal of the thing and that he has case Jose died, payment should be made to
the capacity to alienate. The absence of either of the his heirs.
two requirements will render the payment he made to Any persons authorized to receive payment (Art.
be invalid. Hence, if payment is invalid, the payment 1241)
made by such incapacitated person may be
recovered. The term any person authorized to receive payment
may refer to any of the following:
Example: Joey sold his cellphone in the amount of
P20,000.00 to Ching, a minor, she paid the same in 1. Guardian of a ward (Ward means a minor or
cash. May Ching or her guardian recover the a person of age but has mental disposition)
P20,000.00 she paid to Joey? 2. Administrator of executor of the estate of a
deceased
Yes, Ching or her guardian may recover the amount 3. Liquidator of a partnership/corporation
of P20,000.00 from Joey because the payment made 4. Persons authorized by special power of
by Ching who is a minor is disqualified to enter into a attorney
contract. 5. Third person provided that the payment
When right to recover does not apply benefits the creditor

Note, however, that if a minor without the knowledge Effect of Payment made to the creditor who is
of his parents or guardians voluntarily pays a sum of incapacitated, exceptions: (Art. 1241)
money or delivers a fungible thing in the fulfillment of As creditor, it is his right to receive payment from the
an obligation shall have no right to recover the same debtor. This is however on the assumption that the
from the creditor if the latter had spent the money or creditor has full capacity to receive the same.
consumed the fungible thing in good faith.
If the creditor is incapacitated to receive the
Good faith, therefore, on the part of the creditor is payment, such as when the creditor becomes
required in order to bar recovery of payment made insane, the payment made to him.is not a valid
by incapacitated person. Otherwise, if the creditor payment.
acted in bad faith, there will be no recovery.
The following, however, are the exceptions where
Example: Jolord sold his Samsung Galaxy S10 payment made to incapacitated creditor is
cellular phone to Jocel, a minor in the amount of considered valid:
P20,000.00.
1. If the incapacitated creditor has kept the thing
Jocel paid the same in cash. Jolord, however, did not delivered; or
know of the minority of Jocel. Jolord already spent
 2. Insofar as the payment has been beneficial to he gave the money to Manuel. Mara
him. acknowledged the payment.
Example 1: Miles is indebted to Maricel the amount 3. If by the creditor's conduct, the debtor has
of P20,000.00 to be paid on April 1, 2020. On due been led to believe that the third person had
date, Miles paid Maricel who at the time of payment authority to receive the payment or what we
the latter was already insane. If Maricel kept the call estoppel (estoppel means an admission
whole P20,000.00, then the payment made by Miles or representation is rendered conclusive
is valid. upon the person making it and cannot be
denied or disproved as against the person
Example 2. In the above example, supposed Maricel relying thereon).
bought foods and clothes worth P5,000.00 and
burned the P15,000.00 cash. Example: Jose is indebted to Mara in the
amount of P10,000.00 which is due on July
Was there a valid payment? 15, 2020. Mara informed that his boyfriend
Yes, but only as to the amount of P5,000.00 since Kelvin can receive the payment. On July 14,
this amount is beneficial to her. 2020, Mara and Kelvin broke up. The
following day, Jose went to Kelvin and
Payment made to third person instead to the delivered the money as payment of his debt.
creditor (Art. 1241) Here, the payment made by Jose to Kelvin is
valid.
The third person is not a party to a contract; hence, it
has no business in the transaction. Thus, in a Payment made to person in possession of the
contract of loan, the debtor should pay the creditor or credit other than the creditor (Art. 1242)
the person he authorized to receive the payment.
Otherwise, payment made by the debtor to the third In this case, the debtor is considered to have paid his
person is not valid payment as a general rule. obligation if he made the payment in good faith to
any person in possession of the credit.
However, payment made by the debtor to third
person may be considered valid payment if the Example: Jocelyn is indebted to Mario. She executed
payment to the third person has redounded to the a negotiable promissory note to bearer and deliver
benefit of the creditor. the same to Mario. (Note that in bearer instrument,
anyone who holds the same has right to enforce or
In the following cases, the benefit to the creditor collect to the maker or indorsers the amount
need not be proven: indicated in the bearer instrument).
1. If after the payment, the third person acquires Unfortunately, the note was lost but the same was
the creditor's rights, otherwise known as the discovered by James. Thereafter, James went to
subrogation. Jocelyn to collect/enforce the amount written in the
note. Jocelyn, believing in good faith that James
Example: Danna owes Grace P20,000.00
acquired the note through delivery from Mario, paid
due on May 15, 2020. Seng, a third person,
James.
paid Grace P20,000.00 with the consent of
Danna. Here, Seng is subrogated to the Can Mario demand payment from Jocelyn?
rights of Grace. This means that whatever are
the rights of Grace against Danna can now No, Jocelyn is already released from her obligation.
be exercised by Seng. If Danna pays Seng, By virtue of the bearer instrument which was
the same is valid. presented to her, Jocelyn pays her obligation in good
faith.
2. If the creditor ratifies the payment to the third
person or ratification. Payment made to the creditor by the debtor after
the latter has been judicially ordered to retain
Example: Jose is indebted to Mara in the debt. (Art. 1243)
amount of P10,000.00 payable on July 15,
2021. On the said date, Jose went to the If the debtor pays the creditor after the former has
house of Mara to pay. However, Mara was been judicially ordered to retain the debt, such
not around at that time, thus, Jose handed payment shall not be considered a valid payment.
the payment to Manuel, the son of Mara. After This happens when there is an order of garnishment
an hour, Jose called Mara to inform him that or attachment.
Example: Erick is indebted to Jose in the amount of parties agreed that the debtor should pay using
P100,000.00. Angel, on the other hand, owes Erick a dollar or euro then it should be paid using the
sum of money. Jose failed to pay his obligation to currency agreed upon.
Erick. The latter filed a case for collection of money
against Jose. Erick included in his complaint that an If, on the other hand, the currency stipulated is not
order be issued against Angel not to pay Jose or to possible to pay or by implication if the parties did not
retain the debt in the meantime. This is called stipulate as to what currency is to be used, then the
garnishment. payment should be made in legal tender of the
Philippines.
If despite the order of the court, Angel still paid Jose,
such payment is not considered a valid payment. Legal Tender in the Philippines
This is so because Jose was already judicially All notes and coins issued by the Bangko Sentral ng
ordered to retain the debt. Pilipinas are legal tender of the Philippines. This
The debtor cannot compel the creditor to accept means that the notes or coins can be used as
the things which is different to that which is due payment and must be accepted.
(Art. 1244) However, there is a limit to the legal tender power of
The general rule is that the creditor shall be paid only the coins. In the case of coins in denomination of P1,
what has been stipulated upon because the contract P5, P10, and P20 they shall be legal tender in
between the contracting parties is the law between amounts not exceeding P2,000.00. While coins in
them. Hence, the parties should follow what has denomination of 1 centavo, 5 centavos, 10 centavos
been stipulated. and 25 centavos, are considered legal tender if used
in amounts not exceeding P100.
The rule applies even though the thing being offered
as substitute is worth more than the very thing Thus, if the debtor pays using the coins, the debtor
agreed to be delivered. must make sure that the payment using the coins
does not exceed the aforementioned amounts
Example: RJ is a veterinarian. He met John to buy otherwise they will not be considered legal tender for
the latter's sickly horse for the purpose of examining payment.
its organs. It was agreed that the sickly horse be
delivered on April 15, 2021, to which John agreed. Example: Zeke opened his piggy bank. He was able
On due date, John delivered a healthy horse instead to save P10,000.00 composed of coins. Zeke intends
of the sickly horse which was earlier agreed upon. to buy a cellphone worth P8,000.00. He wants to use
the coins as payment. Can the seller refuse to accept
Can RJ refuse to accept the healthy horse delivered the P8,000.00 worth of coins as payment by Zeke?
by John? Yes, because the legal tender power of coins has a
limitation up to P1,000 only.
Yes, it is clear that the debtor cannot be compelled to
accept or receive a thing different to what has been On the other hand, notes regardless of denomination
agreed upon, although the latter may be of the same (P50, P100, P200, P500 or P1000) are legal tender
value or more valuable than that which is due. for any amount of obligation. Notes have no limitation
on their legal tender power.
Exception to the rule
Payment by means of check and other
While it is true that the debtor cannot compel the commercial documents
creditor to receive the thing which is different from
what has been agreed upon, the same admits of an Checks of whatever kind is not a legal tender.
exception, such as when substitution is allowed with Promissory note, bill of exchange and other
the consent of the creditor in a facultative obligation commercial documents are not legal tender. Thus,
or when the creditor waives his right to not to accept. the creditor may refuse to accept these documents
as payment.
Payment must be in legal tender when the
obligation is a monetary obligation (Art. 1249) However, if the creditor accepted the check or other
commercial documents, it does not mean that the
Legal tender refers to the currency which may be debtor is already paid. These commercial documents
used for payments of debts whether public or private, like check shall produce the effect of payment once
and which the creditor cannot refuse to accept. the same has been cashed.
The rule is that in payment of debts in money, it shall
be made in the currency stipulated. Thus, if the
Example: Aldwin owes Kelvin P25,000.00. Aldwin obligation. Unless, of course there is an agreement
issued a check to Kelvin. May Kelvin refuse to accept to the contrary.
the check as payment? Yes, because check is not a
legal tender. Rules on place of payment (Art. 1251)

Supposed, Kelvin accepted the check, is Aldwin's The rule is that payment shall be made in the place
obligation extinguished? No, the check issued by agreed upon by the party. In the absence of any
Aldwin will not produce the effect of payment. agreement, the following rules are to be applied:
Aldwin's obligation will only be extinguished once the 1. If the obligation is to deliver a determinate
check has been encashed. thing, payment shall be made at the place
Inflation and deflation (Art. 1250) where the thing was;
2. In any other case the place of payment shall
An extraordinary inflation exist when there is a be at the residence of the debtor. If the
decrease or increase in the purchasing power of the debtor, however, changes his domicile in bad
Philippine currency which is unusual or beyond the faith, or the debtor changes his residence
common fluctuation in the value of said currency, and after he has already incurred in delay, the
such increase or decrease could not have been debtor shall bear additional expenses that the
reasonably foreseen or was manifestly beyond the creditor had incurred.
contemplation of the parties at the time of the
establishment of the obligation. Special forms of payment

The supervening of extraordinary inflation is never The special forms of payment are:
assumed. The party alleging it must lay down the a. Dation in payment;
factual basis for the application of Article 1250. b. Application of payment;
In the Filipino Pipe Corporation versus National c. Payment by cession;
Water Works case, the Court acknowledged that the d. Tender of payment and consignation.
voluminous records and statistics submitted by a. Dation in payment (dacion en pago) (Art. 1245)
plaintiff-appellant proved that there has been a
decline in the purchasing power of the Philippine Dation in payment or dacion en pago is a special
peso, but this downward fall cannot be considered form of payment whereby the property is alienated by
"extraordinary" but was simply a universal trend that the debtor to the creditor to pay a debt in money. The
has not spared our country. alienation of the property extinguishes the monetary
obligation.
Similarly, in Huibonhoa v. Court of Appeals, the Court
dismissed plaintiff-appellant's unsubstantiated In dacion en pago, as a special mode of payment,
allegation that the Aquino assassination in 1983 the debtor offers another thing to the creditor who
caused building and construction costs to double accepts it as equivalent of payment of an outstanding
during the period July 1983 to February 1984. debt.
In Serra v. Court of Appeals, the Court again did not The undertaking really partakes in one sense of the
consider the decline in the peso's purchasing power nature of sale, that is, the creditor is really buying the
from 1983 to 1985 to be so great as to result in an thing or property of the debtor, payment for which is
extraordinary inflation. to be charged against the debtor's debt. As such, the
essential elements of a contract of sale, namely,
It is worth mentioning that in the case of Telengtan consent, object certain, and cause or consideration
Brothers & Sons, Inc. v. United States Lines, the must be present.
court stated that in the absence of an official
pronouncement or declaration by competent Example: Lenin is indebted to Jeddy the amount of
authorities of the existence of extraordinary inflation P100,000.00 to be paid on December 14, 2019. On
during a given period, the effects of extraordinary due date, Lenin proposes to Jeddy to accept his
inflation are not to be applied. 1990 Toyota Corolla car in payment of his debt
amounting to P100,000.00. Jeddy accepted his
Basis of payment in case of extraordinary proposal. The car was delivered as payment. In this
inflation or deflation case Lenin's obligation is totally extinguished.
The basis of payment in case of extraordinary Note that in the above example, Lenin did not
inflation or deflation shall be the value of the mortgage or pledge any property from the beginning.
currency at the time of the establishment of the
It was only on the due date when Lenin proposed to payment shall be applied when the debtor has
deliver his car as payment of his loan. several obligations of the same kind in favor of the
same creditor.
It would be different if in the beginning the parties
entered into a mortgage and stipulated that the Requisites of application of payment
failure to pay will make Jeddy the owner of the
property mortgage. This is not allowed as this In order that there will be an application of payment,
constitutes pactum commissorium. the following requisites must be present. To wit:

Dation in payment is not a Pactum 1. There must be two or more debts of the same
Commissorium kind;
2. There must only be one debtor who owes the
Pactum Commissorium is the automatic various debts in favor of the same and only
appropriation by the creditor of the thing pledged or one creditor;
mortgaged upon the failure to of the debtor to pay 3. That all the debts must already due, except
the principal obligation. when the parties have stipulated that
payment may be applied to a debt which is
Article 2088 of the Civil Code prohibits the creditor not yet due or when the application is made
from appropriating the things given by way of pledge by the party for whose benefit the term has
or mortgage, or from disposing of them; any been constituted;
stipulation to the contrary is null and void. The 4. The amount paid by the debtor is not
elements for pactum commissorium to exist are as sufficient to cover all debts.
follows, to wit:
Right to make application of payments
(a) that there should be a pledge or mortgage
wherein property is pledged or mortgaged by The right to make application of payments primarily
way of security for the payment of the belongs to the debtor. This right shall subsist until he
principal obligation; and makes the payment.
(b) that there should be a stipulation for an
automatic appropriation by the creditor of the If at the time of payment, the debtor did not exercise
thing pledged or mortgaged in the event of this right, the creditor may make the designation by
non-payment of the principal obligation within specifying in the receipt in which the application of
the stipulated period. the payment is made. If the debtor accepted the
receipt, he can no longer question it unless there is a
Example: Miles is indebted to Joanna in the amount cause for invalidating the application.8
of P500,000.00 to be paid on December 15, 2019. To
secure the loan obligation, Miles mortgaged a parcel Example: Ferdinand owes Willard various debts, to
of land covered by TCT No. 1234. wit:

In the deed of real estate mortgage, it was stipulated a. P10,000,00 due on Jan. 15, 2020
that that in the event Miles failed to pay her loan b. P10,000.00 due on Feb. 15, 2020
obligation, the parcel of land covered by TCT No. c. P10,000.00 due on March 15, 2020
1234 shall be automatically be owned by Joanna. d. P10,000.00 due on March 30, 2020

Is the agreement valid? On March 10, 2020 Ferdinand has only P10,000.00
but wants to pay Willard. Here Ferdinand may
No, this kind of agreement is a pactum exercise his right to designate which debt he is going
commissorium which is null and void. The stipulation to pay.
of automatic transfer of ownership of the mortgaged
property to Joanna is void. Consequently, Ferdinand may apply the payment to
any of the debts due on Jan. 15 or February 15,
Note that the creditors right or the mortgagee has to 2020 because on March 10, 2020 the two debts are
foreclose the property judicial or extra judicial as the already due.
case may be and sold the same through public
auction. The proceeds of the sale shall be applied as Ferdinand cannot choose to pay the debts due on
payment of the principal loan obligation. March 15 and March 30 simply because on March
10, 2020 they are not yet due unless Ferdinand is
b. Application of payments (Art. 1252 – Art. 1254) allowed to do so by express agreement or the benefit
of the period is given to him.
Another special form of payment is the application of
payments. This is the designation of debt to which
Supposed Ferdinand did not exercise his right, Example: Jolord borrowed money from Nikkie the
Willard may make the designation in the receipt with amount of P30,000.00 secured by a real estate
the consent of Ferdinand. If the latter accepted the mortgage and the same is due on January 15, 2020.
receipt, he cannot complain after. However, Willard
can only apply the payment made by Ferdinand to Thereafter, Jolord still in dire need of money, thus, he
debts which are already due. again borrowed money from Nikkie in the amount of
P30,000.00 without interest or security.
Thus, Willard may choose to apply the payment
either on the debts due on Jan. 15, 2020 or February Jolord made a partial payment to Nikkie. Assuming
15, 2020. Willard, however, just like the right given to that Jolord did not specify the debts to which the
Ferdinand if the latter exercised, may apply the payment should be applied, and the creditor did not
payment to any of the debts which are not yet due specify in the receipt she issued where she applied
provided that there is an agreement to that effect of the payment, the partial payment made by Jolord
when the benefit of the period was given to Willard. should be applied to P30,000.00 indebtedness
because this is more burdensome to him due to the
If the debt produces interest mortgage that was constituted on it.
Under Article 1253 of the Civil Code, if the debt Rule when the debts is of the same burden
produces interest, payment of the principal shall not
be deemed to have been made until the interests The rule is, however, different if the debts are of the
have been covered. same burden, in which case the payment made by
the debtor shall be applied proportionately.
Article 1253 resolves doubts involving payment of
interest-bearing debts. It is given under this article Again, in the same example above assume that the
that the debt produces interest. two debts of Jolord are both secured by mortgage
and assume also that Jolord made a partial payment
The doubt pertains to the application of payment; the of P30,000.00 The said amount shall be
uncertainty is on whether the amount received by the proportionately be applied to both debts since both
creditor is payment for the principal or the interest. debts have the same burden.
Article 1253 resolves this doubt by providing a
hierarchy: payments shall first be applied to the c. Payment by Cession (Art. 1255)
interest; payment shall then be applied to the Payment by cession is a special form of payment
principal only after the interest has been fully- paid. wherein the debtor assigns or abandons all his
The rule under Article 1253 that payments shall first properties for the benefit of his creditors in order for
be applied to the interest and not to the principal the creditors to sell the said properties and apply the
shall govern if two facts exist: (1) the debt produces proceeds of thereof to the satisfaction of their credits.
interest (e.g., the payment of interest is expressly Here, it contemplates the existence of two or more
stipulated) and (2) the principal remains unpaid. creditors and involves the assignment of all the
 Example: Jose entered into a contract of loan debtor's property.
with GL, in the said contract, GL will lend Requisites
Jose the amount of P20,000.00 with
P2,000.00 accrued interest. On due date, This form of payment may be availed of by the
Jose paid GL P20,000.00. Jose's obligation is debtor provided that the following requisites are
not yet extinguished. Since, in the present. To wit:
P20,000.00, the amount of P2,000.00 shall
1. There must be two or more creditors;
be deducted first to cover the interest
2. The debtor is insolvent;
because the rule is that the interest must be
3. The debtor must abandon or assign all his
paid first. Consequently, the remaining
properties; and
P18,000.00 shall be applied to the principal
4. All the creditors must accept the assignment.
obligation. Jose still owes GL P2,000.00.
Example: Morris owes Lenin P100,000.00, Robie
Rule in case the debt is more onerous than the
P200,000.00 and Aldwin P300,000.00 or a total of
other debt
P600,000.00. All these debts are already due and
In the event that the debts due are not of the same demandable.
burden, the rule is that the debt which is most
Assuming that Morris has only a parcel of land and a
onerous or burdensome to the debtor shall be
car as his assets. Here, Morris may assign his assets
deemed to have been satisfied.
to Lenin, Robie and Aldwin. If they accept the Example: Joanna borrowed from Grace the amount
assignment, the creditors shall sell the properties of P50,000.00. On due date Joanna tendered
and apply the proceeds to their respective claims. P50,000.00 in cash, however Grace refused to
accept the money without any reason at all. Is
Thus, if the assets are sold in the amount of Joanna's obligation extinguished? No, the tender of
P600,000.00 then the obligation of Morris is payment by Joanna does not clear her from
extinguished. However, if the assets are sold only in responsibility.
the amount of P500,000.00, then Morris is still liable
to pay the balance of P100,000.00 unless there is an What should Joanna do in order that she will be
agreement that the assignment shall completely released from her responsibility? Since the refusal of
release the debtor from his debts. Grace to accept the money is without valid reason,
Joanna may consign or deposit the payment in court,
Dation in payment versus Payment by cession this is what we call the consignation.
Dation in payment and Cession are two different Assuming that on due date, Joanna only tendered
forms of payment. The two can be distinguished as P20,000.00 to Grace. Grace refused to accept the
follows: P20,000.00. May Joanna make a valid consignation?
1. In dation in payment there may be only one No, Joanna cannot make a valid consignation
creditor while incession it is required that because there is a valid ground on the part of Grace
there must be two or more creditors; to refuse the payment. Note that the creditor cannot
2. In dation in payment the debtor is not be compelled to accept partial payment.
necessary insolvent while in cession the When tender of payment not required (Art. 1256)
debtor must be insolvent;
3. Dation in payment does not affect all the Under normal circumstances, there is a need that the
properties of the debtor, however in Cession, debtor must first tender his payment, if the creditor
the debtor must assign or abandon all his refused, the debtor may file a petition for
properties. consignation.
4. In dation in payment, the creditor becomes
the owner of the property as payment of the However, in the following instances, tender of
obligation while in cession, the assets or payment is not required, and that the debtor may
properties of the debtor are assigned to the directly proceed with consignation which shall have
creditors in order for properties to be sold and the effect of extinguishment of an obligation.
the proceeds thereof shall apply to the The debtor shall be released from responsibility by
credits. the consignation of the thing or sum due, without
d. Tender of payment and consignation (Art. need of prior tender of payment, when-
1256) 1. The creditor is absent or unknown, or does
Tender of payment is the act of the debtor of not appear at the place of payment;
offering to the creditor the amount or thing due to the 2. When he is incapacitated to receive the
latter. payment at the time it is due, or
3. When without cause, he refuses to give a
Consignation, on the other hand, is the act receipt;
depositing the thing or the amount due by the debtor 4. When two or more persons claim the same
with the proper court whenever the creditor refuses right to collect, or
to accept the said thing or the amount without just 5. When the title to the obligation has been lost.
cause or in the cases when the creditor cannot
accept it. Requisites of a valid consignation

Tender of payment does not by itself extinguish The requisites of a valid consignation are:
the obligation 1. A debt due;
Tender of payment is not a mode of extinguishing an 2. The creditor to whom tender of payment was
obligation. Tender of payment even if it's valid does made refused without just cause to accept
not produce payment, unless it is completed by the payment, or the creditor was absent,
consignation. Thus, consignation of the thing due unknown or incapacitated, or several persons
releases the debtor of his responsibility. claimed the same right to collect, or the title
of the obligation was lost;
 3. The person interested in the performance of Before that time, the debtor is still the owner, and he
the obligation was given notice before may withdraw it; in this case, the obligation will
consignation was made; remain in full force as before the deposit.
4. The amount was placed at the disposal of the
court; and But once the consignation has been accepted by the
5. The person interested in the performance of creditor or judicially declared as properly made, the
the obligation was given notice after the debtor loses his right over the thing or amount
consignation was made. deposited, and he cannot withdraw the same without
the consent of the creditor; if the creditor consents to
Prior notice to all interested parties is required the withdrawal in such case, the obligation is revived
(Art. 1257) as against the debtor personally, but all rights of
preference of the creditor over the thing and all his
In order that the consignation of the thing due may actions against co-debtors, guarantors and sureties
release the obligor, it must first be announced to, or are extinguished.
must notify all the persons interested in the fulfillment
of the obligation such as the guarantor if there is any,
solidary debtor if there is any. The consignation shall
be ineffectual if these interested persons were not
notified prior to the filing of consignation.
Giving of notice to all interested parties is
required after consignation (Art. 1258)
Once the consignation is made, that is the thing or
the amount has already been deposited to the court,
the interested parties must be notified again.
2. BY THE LOSS OF THE THING DUE OR
This is actually a second notice that the interested IMPOSSIBILITY OF PERFORMANCE (Art. 1262 –
parties must receive. The purpose of this second Art. 1269)
notice is to inform them that the thing or the sum of
money is already in court so that the creditor most Loss of the thing may have the effect of
especially may withdraw it if he accepts the extinguishing an obligation. The thing is lost when it
consignation. perishes, or goes out of commerce, or disappears in
such a way that its existence is unknown or it cannot
Creditor shall pay the expenses of consignation be recovered.
(Art. 1259)
The thing lost must be a determinate thing (Art.
The creditor shall pay all the expenses of 1263)
consignation made by the debtor. Note, however,
that the creditor is only obliged to pay the expenses It is worth to emphasize that the thing referred to is a
when the debtor made the consignation validly or determinate thing. It does not apply to generic thing
correctly, otherwise, there is no obligation on the part because generic thing never perishes (genus
of the creditor to pay the expenses. nunquam perit). The obligation to deliver generic
thing may be made by delivering the thing of the
Effect of Consignation (Art. 1260) same class as the one lost.
Once consignation has been properly made, the The loss of the determinate thing does not
debtor may now ask the court that his obligation to automatically extinguish the obligation (Art.
the creditor be cancelled, in which case the debtor's 1264)
obligation is extinguished.
It is not worthy that the loss of the determinate thing
Withdrawal by the debtor of the thing or the per se does not automatically extinguish the
amount deposited and its effect (Art. 1261) obligation. The debtor in order to be released from
The right of the debtor to withdraw the thing or his obligation must prove that the determinate thing
amount deposited in court depends upon whether or was lost or destroyed without his fault and that he is
not the consignation has already been accepted or not guilty of delay.
judicially declared proper. Instances when the loss of the determinate thing
will not extinguish the obligation (Art. 1265 – Art.
1269)
There are, however, instances where debtor's When presumption does not apply
obligation will not extinguish even if the specific thing
was lost without his fault and he is not guilty of delay. The above presumption does not apply in case of
earthquake, flood, storm, or another natural calamity.
These instances are: The reason being that in case of a natural calamity,
1. When it was stipulated by the parties; lack of fault is more likely.
2. When the law so provides such as when the
obligor delays, or has promised to deliver the Impossibility of Performance
same thing to two or more persons who do The debtor in obligations to do shall also be released
not have the same interest, he shall be when the prestation becomes legally or physically
responsible for any fortuitous event. impossible without the fault of the obligor.
Example: Robie sold his vintage car with Effect of the obligation that becomes legally or
plate number ABC 1234 to Morris in the physically impossible to do
amount of P300,000.00. They agreed,
however, that the car will be delivered to The obligor incurs no liability for damages when his
Morris on May 11, 2020.Pending delivery, obligation becomes legally or physically impossible
Robie sold the same car again to Turibio who to perform without his fault. It is worth to emphasize
also paid the same price but with the that the supervening impossibility of performance
stipulation that the car will be delivered on must be based upon some factor independent of the
May 11, 2020. On May 5, 2020, the car was will of the obligor and that the obligor must not yet in
carnapped. Robie is liable for its loss to delay.
Morris and Turibio even if the car was lost
due to fortuitous event. To be free from liability, therefore, due to physical or
legal impossibility, the following requisites must
3. When the nature of the obligation requires the concur:
assumption of risk.
Example: The insurer in an insurance a. The obligation must be an obligation "to do";
4. When the obligation to deliver arises from a b. The obligation must have become legally or
criminal offense. physically impossible to perform without the
Example: Turibio was convicted for fault of the debtor and before he has incurred
carnapping the car of Lenin. The court in delay;
ordered him to return the car to Lenin not c. The impossibility must have occurred after
later than May 11, 2020. On May 1, 2020 the the constitution of the obligation. It should not
car was hit by a lighting and was totally be present before the obligation was
destroyed. Here Turibio is liable for the loss of constituted.
the car even if it was due to fortuitous event
Kinds of Impossibility
because the car is the proceed of a crime.
1. Legal Impossibility - It arises from a change
Effect of partial loss of the object
in the law.
In case of partial loss or destruction, the court shall
Example: Morris enters into a contract with
have the discretion to determine whether the partial
CCT Corp, a construction company,
loss or destruction is so important that would have
obligating itself under a bond to construct a
the effect of complete loss or destruction.
house upon a particular tract of land. Before
Presumption of Fault
the construction of the house is completed,
It is presumed that the debtor is at fault if he is in the the government acting under a law
possession of the thing which was lost. In which case appropriated the land under the power of
the debtor's obligation is not extinguish. In other eminent domain for some public purpose thus
words, the debtor has to pay the creditor for preventing the contractor from complying with
damages. his obligation.

Note, however, that this is only a presumption. Thus, 2. Physical Impossibility - In a personal
the debtor may introduce proof or evidence to show obligation, it arises principally from the death
that the loss or destruction of the thing was not due of the obligor or from the death of the oblige,
to his fault. He may prove that the thing was lost due when the act can be of possible benefit only
to fortuitous event provided that the debtor is not to him.
guilty of delay.
 Example: Pedro obligated himself in a Malay Co. Insurance Corp. received an information
contract to render some particular personal that the one who carnapped the vehicle was Justine.
service and give a bond for the performance Applying Article 1269, Malay Co. Insurance Corp.
of such service, but before the time arrives for may file an action against Justine directly to recover
the performance of the obligation, Pedro dies. the amount paid by it to Jose with damages.
When the service has become so difficult as to be 3. BY THE CONDONATION OR REMISSION OF
manifestly beyond the contemplation of the parties, DEBT (Art. 1270)
the obligor may also be released therefrom, in whole
or in part. Condonation or remission is the gratuitous
abandonment by the creditor of his right against the
In applying this, the following conditions should debtor. Simply stated, it is the waiver or renunciation
concur, namely: of the creditor's right to collect payment from the
1. The event or change in circumstances could debtor. (Art. 1270)
not have been foreseen at the time of the Essential requisites of condonation or remission
execution of the contract;
2. It makes the performance of the contract 1. It must be gratuitous;
extremely difficult but not impossible; 2. It must be accepted by the debtor;
3. It must not be due to the act of any of the 3. The debtor and the creditor must have legal
parties; and capacity;
4. The contract is for a future prestation. 4. It must not be inofficious;
5. It must be demandable; and
The difficulty of performance should be such that the 6. It must be in proper form in case of express
party seeking to be released from a contractual condonation.
obligation would be placed at a disadvantage by the
unforeseen event. Mere inconvenience, unexpected Kinds of Condonation
impediments, increased expenses, or even
pecuniary inability to fulfil an engagement, will not 1. As to form
relieve the obligor from an undertaking that it has a. Express Condonation - when the
knowingly and freely contracted.15 condonation is made verbally or in writing.
Example: Barney Construction Corp. agreed to Since condonation is actually a donation then
construct a rest house near the beach and within the the formalities prescribed by law to have a
area where construction of building is allowed. valid donation must be followed.
Before the construction, a strong earthquake b. Implied Condonation - when it can be
happened which caused tsunami. As a consequence, deduced from the conduct of the creditor
the place where the rest house is to be built was such as when the creditor voluntarily delivers
severely damaged and has become dangerous to the private document evidencing the credit to
live in. This event was not foreseen by the parties. In the debtor.
this case, the obligation Barney Construction Corp. 2. As to extent
to construct the rest house is extinguished.
a. Total Condonation - when the entire
Effect of extinguishment of obligation due to the obligation (the principal and the accessory
loss of the thing obligations such as the interest) is condoned.
All rights of the debtor against third person by reason b. Partial Condonation - when it condoned
of the loss will be transferred to the creditor. In which only part of the obligation.
case the creditor may proceed to file action against The condonation must not be inofficious
the third person. otherwise the same shall be reduced (Art. 1271)
Since it is the law that confers the transfer of rights, A person's prerogative to make donations is subject
there is no need to execute or enter into a deed of to certain limitations, one of which is that he cannot
assignment of rights from the debtor to creditor. give by donation more than he can give by will. If he
Example: Jose took a comprehensive insurance from does, so much of what is donated as exceeds what
Malay Co. Insurance Corp. for his Toyota Rush with he can give by will is deemed inofficious and the
plate number NEI 1234. On May 11, 2020 his car donation is reducible to the extent of such excess.
was carnapped. Malay Co. Insurance Corp.
indemnified Jose for the loss of the car. Thereafter,
Presumption in case of delivery of evidence of Danna condoned the whole P10,000.00, it follows
credit to debtor (Art. 1271) that the guaranty of Joanna shall likewise be
extinguished. But if only the guaranty of Joanna is
There is a legal presumption of renunciation of action condoned, the obligation of Betty remains.
where a private document evidencing a credit was
voluntarily returned by the creditor to the debtor. Presumption when the thing pledged after its
delivery to the creditor is found in the
This presumption is merely prima facie and is not possession of the debtor or of a third person
conclusive; the presumption loses efficacy when who owns the thing (Art. 1274)
faced with evidence to the contrary.
In a contract of pledge, the debtor delivers to the
Presumption in case the private document is creditor or to a third person a movable or instrument
found in possession of the debtor evidencing incorporeal rights for the purpose of
In the ordinary course of transaction, it is the creditor securing the fulfillment of the principal obligation with
who holds the private document such as the the understanding that when the obligation is fulfilled
promissory note to prove that the debtor is the thing delivered shall be returned to the debtor.
indebtedness to him. Of course, this document will Now, if the thing pledged is found in the possession
be used as evidence in court if action is filed against of the debtor or of a third person who owns the thing,
the debtor. there is a presumption that the accessory obligation
However, if the said private document evidencing the of pledge is presumed to be remitted. It should be
credit is found in the possession of the debtor, then noted that what is remitted is not the obligation itself
there is a presumption that it was delivered but only the accessory obligation which means that
voluntarily by the creditor to the debtor. There is also the creditor agreed to the loan without the pledge.
a presumption that the creditor impliedly condoned Example: Susan borrowed money from Jimmy the
the obligation of the debtor. amount of P10,000.00. Susan delivers her lacoste
This presumption can be destroyed by presenting a wristwatch in pledge to guarantee the payment of
contrary evidence showing that the private document loan. If the lacoste wristwatch is found later on in the
was not delivered voluntarily by the creditor. (Art. possession of Susan, the presumption is that Jimmy
1272) remitted the thing pledged which means that the loan
remains in effect without a need of the pledge.
Example: Jose barrowed money from Maica the
amount of P10,000.00 to be paid in May 11, 2020. 4. BY CONFUSION OR MERGER OF THE RIGHTS
Jose executed a promissory note in favor of Maica. OF CREDITOR AND DEBTOR (Art. 1275)
The promissory note was delivered to Maica. Confusion or merger is the meeting in one person
If the promissory note was delivered voluntarily by of the qualities or the characters of the creditor and
Maica to Jose, the presumption is that Miaca debtor. Simply stated, confusion arises when one
condoned the obligation of Jose applying Article person becomes the debtor and creditor of one and
1271. the same obligation.

If on the other hand, the promissory note was found Example: M issued a negotiable promissory note
in the possession of Jose and it was not known how amounting to P10,000.00 payable to P or order. P
it was happened, then the presumption is that Maica negotiated the note to A and then it was negotiated to
delivered the note to him. Since this is only a B, B to C and C to D. D negotiated the note back to
presumption, Maica may introduce evidence to prove M. Here, M the debtor becomes the creditor of the
that she did not deliver the note. same obligation and therefore, his obligation to
himself is extinguished.
Effect of renunciation of the principal debt (Art.
1273) Effect of merger in person of principal debtor or
creditor (Art. 1276)
The remission of the principal obligation extinguishes
the accessory obligation following the rule that The merger in the person of the principal debtor or
accessory follows the principal. However, the waiver creditor extinguishes not only the obligation but also
of the accessory obligation does not carry with it that the accessory obligation such as the guaranty of the
of the principal debt. guarantor.

Example: Betty borrowed money from Danna the Example: M executed a promissory note and issued
amount of P10,000.00 with Joanna as guarantor. If to P for the amount of P10,000.00 which is
guaranteed by G. P negotiated the note to A, A to B, Compensation is defined as a mode of
B to C, and C back to M. M's debt is extinguished at extinguishing obligations whereby two persons in
the same time G's guaranty is extinguished since the their capacity as principals are mutual debtors and
principal obligation it guarantees has been creditors of each other with respect to equally
extinguished. liquidated and demandable obligations to which no
retention or controversy has been timely commenced
Effect of merger in person of the guarantor (Art. and communicated by third parties.
1276)
In colloquial expression, compensation simply means
Merger which takes place in the person of the "kwits" or "amanos".
guarantor does not extinguish the obligation, only the
guaranty is extinguished. Example: Marlyn and Conie are best of friends. At
the time when Marlyn was hospitalized, Connie lends
Example: M executed a promissory note and issued her money in the amount of P10,000.00 to be paid
to P for the amount of P10,000.00 which is on July 17, 2020. Prior to that however, Conie was
guaranteed by G. P negotiated the note to A, A to B, indebted to Marlyn the amount of P10,000.00 to be
B to C, and C to G. Here G's guaranty is paid also on July 17, 2020. Here, the parties do not
extinguished because the qualities of the debtor and need to pay each other on July 17, 2020 because
creditor are merged in the person of G. However, M's compensation ("kwits") already took place by
obligation is not extinguished since G as the new operation of law.
creditor may still go after M.
Kinds of Compensation
Confusion in a joint obligation (Art. 1277)
1. As to extent
Since in joint obligation, each debtor has his own
creditor to whom he is liable. As such, the merger 1. Total - when the obligations of both parties
extinguishes only the share of the joint debtor or are of the same amount.
creditor in whom the characters of debtor and 2. Partial - when the debts are not equal.
creditor concur.
2. As to origin
Example: A, B, and C are joint debtors of X for
P9,000.00. The promissory note evidencing the debt a. Legal - takes place by operation law even if
is assigned to X. X indorsed the note to Y, then Y to the parties are not aware of the
Z and Z to B. In this case, B's obligation (P3000) as compensation.
joint debtor is extinguished. However, the b. Voluntary or Conventional - takes place by
indebtedness of A and C that is P3000 each remains agreement of the parties.
and they are liable to the new creditor B as to P6000. c. Judicial - it is decreed by the court, in a case
where there is counterclaim.
Confusion in a solidary obligation d. Facultative - here one party can claim
compensation while the other cannot.
Confusion in one of the solidary debtors will result
into the extinguishment of the entire obligation. This Requisites of Legal Compensation (Art. 1279)
is because in a solidary obligation each of the
debtors is liable for the entire obligation, the payment In order to have a legal compensation which has the
made by one of them will result in the extinguishment effect of extinguishing an obligation, the following
of the whole obligation. Note, however that under requisites must be present. Note, that legal
Article 1217 a solidary debtor who pays the entire compensation takes place even if the parties are not
obligation has the right to claim for reimbursement aware of the compensation.
from his co-debtors for the shares which corresponds 1. Each of the parties are principally bound
to them. and that he be at the same time a principal
Example: A, B, and C are solidary debtors of X for creditor of the other.
P9,000.00. The promissory note evidencing the debt Example 1: Marlyn owes Conie P10,000.00.
is assigned to X. X to Y, then Y to Z and Z to B. In Conie, on the other hand, owes Marlyn
this case, the whole obligation is already P10,000.00. Legal compensation takes place
extinguished. B however has the right to claim for because Marlyn and Conie are principally
reimbursement from A and C at P3000 each. bound to each other.
Example 2: Marlyn owes Conie P10,000.00
5. BY COMPENSATION (Art. 1278) with Jolord as guarantor. On the other hand,
 Conie owes Jolord P10,000.00. There will be A debt is liquidated when its existence and
no legal compensation that will take place amount are determined. Example. Jose owes
between Marlyn and Conie because the two Frank P10,000.00 Frank owes Jose an
are not principally debtors and creditors to amount which is to be ascertained. There is
each other. Only Marly is indebted to Connie. no compensation because one of the debts is
In the same manner that there is no legal not yet determined. It is not yet liquidated.
compensation between Conie and Jolord.
While Conie is a principal debtor of Jolord, 5. There must be no controversy over the
Jolord's obligation to Conie being a guarantor debts commenced by third person.
to Marlyn's debt is only subsidiarily. Note that Example. Mike owes Cora P10,000.00. Cora
a guarantor is only liable when all the assets owes Mike P10,000.00. Cora also owes
of the principal debtor have been exhausted Xander P10,000.00. Xander sues Cora and
but were not sufficient to satisfy the claim of asks the court to order Mike not to pay Cora
the creditor. so that when the court renders judgment,
2. Both debts are in money or the things are Mike will have to pay Xander. Thereafter, the
of the same kind and quality if the latter court issued an order and granted the prayers
has been stated. of Xander. Here there is no legal
compensation between Mike and Cora
Example 1: Joseph owes Corry P50,000.00. because there was a controversy over debts
On the other hand, Corry owes Joseph commenced by Xander, a third person.
P50,000.00. Here legal compensation takes
place because the debts are of the same Guarantor may set up compensation as an
kind. exception (Art. 1280)

Supposed, Joseph owes Corry P50,000.00 Recall that only the principal debtor can set up
while Corry owes Joseph P30,000.00. Here against his principal creditor for what the latter owes
there is still compensation because both him. However, by way of an exception the guarantor
debts are in money only that the may set up compensation as regards what the
compensation is not total but partial. creditor may owe the principal debtor.

Example 2: Joseph owes Corry Samsung Example: Dondie owes Connie P10,000.00
S10 plus cellphone while Corry owes Joseph guaranteed by Gascon. Connie owes Dondie
a Lacoste wallet. Compensation will not take P8,000.00. On due date, Dondie is insolvent. How
place because the things are not of the same much is Gascon's liability? Since, there is only partial
kind. compensation Gascon is liable for P2,000.00.
Gascon though not a principal debtor can set up
Example 3: Joseph owes Corry a specific compensation.
horse, while Corry owes Joseph also a
specific horse. There is no compensation Supposed Dondie owes Connie P10,000.00
here because the objects are both specific. guaranteed by Gascon. Connie owes Dondie
The problem here is that one may deliver P10,000.00. On due date, Dondie becomes
inferior or superior than the other. (Article insolvent. How much is Gascon's liability? None, the
1246) obligation of Gascon is extinguished by
compensation.
3. Both debts are due and demandable.
Example:Philip owes Ranie P10,000.00 due Total and Partial Compensation (Art. 1281)
on Jan. 1, 2020 while Ranie owes Philip There is a total compensation when the obligations
P10,000.00 due on February 1, 2020. Legal of both parties are of the same amount.
compensation cannot be set up since the
debts are not due on the same date. Example: Joseph owes Corry P50,000.00. On the
other hand, Corry owns Joseph P50,000.00. Here
However, the parties may agree to there is a total compensation because the debts are
compensate debts which are not yet due and of the same amount.
this is called voluntary or conventional
compensation. On the other hand, there is partial compensation if
there are different amount.
4. The two debts are liquidated.
Example: Joseph owes Corry P50,000.00 while all the requisites of compensation are present, can
Corry owes Joseph P30,000.00. Here there is partial Kelvin claim compensation?
compensation.
Yes, Kelvin may set up compensation and, therefore,
Voluntary or Conventional Compensation (Art. his obligation is extinguished without actually paying
1282) it. This is because the promissory note which was
secured by Kelvin though violence is not yet nullified
The general rule is that both debts or obligations by the court. Lenin should have filed an annulment of
must be due and demandable otherwise, there could contract of loan.
be no legal compensation.
Effect of assignment of rights (Art. 1285)
However, by way of exception, the parties may agree
to compensate debts which are not yet due, this is The effect of assignment of rights upon the debtor's
called voluntary or conventional compensation. right to set up compensation depends on the
following instances:
Example: Philip owes Ranie P10,000.00 due on Jan.
1, 2020 while Ranie owes Philip P10,000.00 due on 1. When the assignment was with the consent
February 1, 2020. Legal compensation cannot be set of the debtor, he cannot set up against the
up since the debts are not due on the same date. assignee (third person) the compensation
However, the parties may agree to compensate that would pertain to him against the assignor
debts which are not yet due. This is a conventional unless he reserved his right to the
compensation because of the agreement of the compensation.
parties to compensate.
Judicial Compensation (set-off) (Art. 1283)
Example: D owes C P1,000.00. C owes D
This kind of compensation takes place when it is P500. C assigned his rights to X with the
decreed by the court, such as in a case where there consent of D. How much can X collect from
is counterclaim. D? Since the assignment made by C to X
was with the consent of D, X can collect the
Example: Dondie filed a complaint for collection of whole P1,000.00 from D.
money in the amount of P50,000.00 representing the
balance that was not paid by James involving a However, if D reserved his right to
particular vehicle. In the answer with counterclaim compensation at the time, he has given
filed by James, he claimed that the car was consent X can only collect P500.
foreclosed by the bank for failure of Dondie to pay
the two monthly installments which was not known to 2. If the creditor notified the debtor of the
James at the time he purchased the car. Thus, in his assignment but the debtor did not give
counterclaim, James demanded P50,000.00 for consent. The debtor may set up
damages. If James will be able to prove his claim, compensation of the debts before the
any compensation that may be declared by the court assignment but not of the subsequent ones.
is called judicial compensation. Example:Dowes C P10,000.00 due on
Compensation of rescissible or voidable January 1, 2020. Cowes D P20,000.00 due
contracts (Art. 1284) on January 5, 2020 Dowes C P10,000. 00
due on January 10, 2020
Compensation may take place even if the status of
the contracts is either rescissible or voidable, D assigned his right to X on January 8, 2020
provided that there is still no judicial declaration and notified C of the assignment, but C did
rescinding or annulling the contract. not consent to the assignment. How much
can X collect from C?
Voidable contracts and rescissible contracts are valid
contracts until the same has been annulled or X can only collect P10,000.00 from C. X
rescinded by the court. Without court declaration, cannot claim P20,000.00 which was already
these contracts remain to be valid contracts. due on January 8, 2020 because C did not
consent to the assignment. On the other
Example: Kelvin owes Lenin P100,000.00. hand, as to P10,000.00 due on January 10,
Thereafter, through violence, Kelvin forced Lenin to 2020, C cannot compensate because the
sign a promissory stating that he is indebted to obligation is not yet due at the time of the
Kelvin in the amount of P10,000.00. Assuming that
 assignment. Comes January 10, 2020 D is to so that the latter may use the same for a
pay C the amount of P10,000.00. certain time and return it. Commodatum is
essentially gratuitous.17
3. If the assignment was without the knowledge There can be no compensation when one of
of the debtor, the debtor may set up the obligations arises from commodantum.
compensation of all debts before he was Example:Tony owes Moris P20,000.00. Prior
notified of the assignment. to that, Morris borrowed a gold necklace
Example: D owes C P10,000.00 due on worth P20,000.00 from Tony to be used on
January 1, 2020. Cowes D P20,000.00 due his wedding day. Can Morris refuse to return
on January 5, 2020 Dowes C P10,000.00 due the gold necklace to Tony due to on the
on January 10, 2020 ground of compensation? No, Morris cannot
set up compensation because the obligation
D assigned his right to X on January 8, 2020 of Morris to return the gold necklace is one of
without the knowledge of C, but C did only commodatum where compensation is not
learn the assignment on January 15, 2020. allowed.
Here C may set up compensation of all debts 3. When one debt arises because of a claim for
before and after the assignment. support.
Article 195 of the Family Code provides the
Instances where legal compensation cannot take
parent's obligation to support his child.
place (Art. 1286 – Art. 1290)
Example: Morris is the minor son of Aldwin.
1. When one debt arises from depositum in a Morris borrowed money from his father
contract of deposit Aldwin amounting to P20,000.00. Note that
The contract of deposit or depositum does as minor, Morris is entitled to support and that
not refer to a bank deposit. Bank deposit is Aldwin as the father has the duty to provide
actually a loan which establishes a that. The father cannot compensate his
relationship between the bank as a debtor obligation to support by the amount of
and the depositor as the creditor. indebtedness of his son Morris.
4. When one of the debts consists in civil liability
Under Article 1962, deposit or depositum is arising from criminal offense.
constituted from the moment a person Example: Tintin is indebted to Turibio the
receives a thing belonging to another with the amount of P10,000.00. During the enhanced
obligation of safely keeping it and of returning community quarantine, Turibio was in dire
the same. need of money but he cannot collect from
Example 1: Tony owes Moris P20,000.00. Tintin because the latter has no money. What
Prior to that Tony delivered to Moris a gold Turibio did is that he stole the cellphone of
necklace worth P20,000.00 for safekeeping. Tintin worth P10,000.00. Tintin filed a criminal
However, Morris failed to return the said case of theft against Turibio and was ordered
necklace. The necklace was lost. Can Morris to pay P10,000.00. Can Turibio set up
set up legal compensation? compensation of the P10,000.00 he lent to
Tintin before? No, because the obligation of
No, because this is an obligation arising from Turibio to pay civil liability arises from a
deposit which cannot be the object of criminal act.
compensation.
Compensation may take place in application
Example 2: Morris has a bank deposit with for payment as a special form of payment
BDO Unibank of P100,000.00. However,
Morris borrowed money from BDO the Recall that in application of payments, the
amount of P100,000.00 to pay a particular debtor has several debts from a single
car. The borrowed amount is now due. Can creditor and that he is only capable to pay
the bank set up compensation? Yes, because some of those debts. In which case, the
deposits in bank are governed by the contract debtor may choose which among those debts
of loan and not by contract of deposit. will his payment be applied.

2. When one debt arises from the obligation of a In the same case, a person who has various
bailee in commodatum. debts or obligations. which can be
In commodantum one of the parties delivers compensated, he may inform the creditor
to another, either something not consumable which one of them shall be compensated.
 Example: Jose is indebted to Maica in the paying her P20,000.00, then there is
amount of P15,000.00 due on January 10, novation by changing the object.
2020 and another P15,000. 00 secured by a  If the two agree that Danna shall take the
chattel mortgage which is also due on place of Miles as the new debtor, there is
January 10, 2020. a novation by substituting the person of
the debtor.
On the other hand, Maica owes Jose P15,
 If the parties agree that Joann shall take
000.00 due also on January 10, 2020.
the place of Maricel as the new creditor
May Jose set up compensation? Yes, Jose then there is novation by subrogating a
may set up compensation by specifying which third person in the rights of the creditor.
among his indebtedness should be
Kinds of Novation
compensated.
1. According to its essence
If Jose fails to inform Maica, the latter should
set up compensation to the debts which was a. Objective or Real condition - the change of
secured by chattel mortgage because this the object or principal
obligation is onerous than the other obligation b. Subjective or Personal - the change of the
of Jose. Note that this is also the rule in debtor or creditor by another.
application of payments under Article 1252. c. Mixed - refers to a combination of the
objective and subjective novation.
Compensation takes effect by operation of law
(Art. 1286) 2. According to form
Compensation becomes automatic for as long as the 1. Express - when the parties expressly
requisites are present. From that moment the declared in unequivocal term that their
reciprocal obligations of the parties are extinguished. obligation is extinguished by a new one which
substitutes the same.
There is no need to execute a contract to give effect
2. Tacit/Implied - it is implied when the new
the compensation. As a matter of fact, consent is not
obligation is incompatible with the old one on
needed for as long as all the requisites for
every point.
compensation are present.
3. As to the extent or effect
a. Total - when novation results in the total
6. BY NOVATION (Art. 1291) extinguishment of the old obligation.
b. Partial or Modificatory - when an old
Novation is defined as the extinguishment of an
obligation is merely modified.
obligation by the substitution or change of the
obligation by a subsequent one which terminates the Requisites of Novation (Art. 1292)
first, either by changing the object or principal
conditions, or by substituting the person of the In every novation, there are four essential requisites:
debtor, or subrogating a third person in the rights
(1) there must be a previous valid obligation;
of the creditor.
(2) the agreement of all the parties to the new
Novation is a contract, the object of which is: either contract;
to extinguish an existing obligation and to substitute (3) the extinguishment of the old contract; and
a new one in its place; or to discharge an old debtor (4) validity of the new one.
and substitute a new one to him; or to substitute a
Novation is not presumed
new creditor to an old creditor with regard to whom
the debtor is discharged. It is never presumed. The Novation is never presumed (novatio non
intention must clearly result from the terms of the praesumitur). The intention must clearly result from
agreement or by a full discharge of the original the terms of the agreement or by a full discharge of
debt.19 the original debt or that the old and the new one be
altogether incompatible.
Example: Miles owes Maricel P20,000.00.
Indications that Novation is present
 If Miles and Maricel agree that Miles
should give Iphone to Maricel instead of There are two ways which could indicate, in fine, the
presence of novation and thereby produce the effect
of extinguishing an obligation by another which obligation; thus, the consent of these three
substitutes the same. persons is necessary.
1. The first is when novation has been explicitly Example: Maica owes Alden P10,000.00 due
stated and declared in unequivocal terms. on May 15, 2020.
2. The second is when the old and the new Before the due date, Maica delegated her
obligations are incompatible on every point. obligation to her friend Marlyn. Alden
consented, thus Marlyn paid the P10,000.00.
Test of incompatibility between the original
Rights of the new debtor once the original debtor
The test of incompatibility is whether or not the two is substituted
obligations can stand together, each one having its
independent existence. If they cannot, they are Once the substitution is effected and the new debtor
incompatible and the latter obligation novates the pays the creditor, the rights granted to him will
first. depend whether the substitution is by way of
expromision or delegacion. Thus,
Corollarily, changes that breed incompatibility must
be essential in nature and not merely accidental. The 1. In expromision, the new debtor may only
incompatibility must take place in any of the essential recover insofar as the payment he made has
elements of the obligation, such as its object, cause been beneficial to the original debtor; while,
or principal conditions thereof; otherwise, the change 2. In delegacion the new debtor shall be
would be merely modificatory in nature and subrogated to all of the rights which the
insufficient to extinguish the original obligation. creditor could have exercised.
Novation by substitution of debtor (Art. 1293 – Effect if the new debtor becomes insolvent or
Art. 1295) when the new debtor did not fulfil his obligation
in case of expromision
Substitution of debtor takes place when the original
debtor is replaced or substituted by the new debtor. Once a substitution has been made, in case of
This substitution, however, must be with the consent expromision the creditor can no longer revive his
of the creditor. action against the original debtor if the new debtor
will subsequently become insolvent or when the new
Types of Substitution debtor did not fulfil his obligation. The creditor cannot
In general, there are two modes of substituting the collect or demand payment from the original debtor.
person of the debtor, note that in either case, the The reason being that already extinguished. by virtue
substitution by the debtor requires the consent of the of the substitution, the obligation of the original
creditor. debtor is

1. Expromision - In expromision, the initiative Example: Maica owes Alden P10,000.00 due on May
for the change does not come from-and may 15, 2020. Before the due date Marlyn a friend of
even be made without the knowledge of-the Maica went to Alden and asked the latter if she can
debtor since it consists of a third person's assume the obligation of Maica and release the latter
assumption of the obligation. As such, it from her obligation. Alden consented. However,
logically requires the consent of the third Marlyn became insolvent and failed to pay Alden on
person and the creditor.23 May 15, 2020. Can Alden proceed against Maica to
collect P10,000.00? No, because the moment Alden
Example: Maica owes Alden P10,000.00 due consented on the novation to substitute Maica, the
on May 15, 2020. Marlyn a friend of Maica obligation of the latter already extinguished.
went to Alden and asked the latter if she can
assume the obligation of Maica and release Effect if the new debtor becomes insolvent in
the latter from her obligation. Alden case of delegacion, exceptions
consented, thus Marlyn paid the P10,000.00 The general rule is that the insolvency of the new
without the knowledge of Maica. Here debtor will not give the creditor the right to revive his
Maica's obligation to Alden is extinguished action against the original debtor.
because Alden consented to the novation.
However, the original debtor is liable in case of the
2. Delegacion - In delegacion, the debtor offers, insolvency of the new debtor when:
and the creditor accepts, a third person
consents to the substitution and assumes the
 1. The insolvency of the new debtor was Example: Karlo agreed to deliver an unlicensed
already existing and of public knowledge; firearm to Tress. Later on, it was agreed that Karlo
or would pay Tress P20,000.00 instead of delivering an
2. The insolvency of the new debtor was unlicensed firearm.
already existing and such fact was known
to the debtor when he delegated his debt. Is there a valid novation? There is none because the
old obligation to deliver an unlicensed firearm is void.
Example: Donald owes Joly P20,000.00 due
on May 15, 2020. Before the due date,
Donald delegated his obligation to Jose to
which Joly consented. However, at the time of
the delegation of debt, Donald already knew Effect if the old obligation is voidable
that Jose is insolvent. In this case, Donald's
If the old obligation is voidable, the novation is valid.
obligation is not extinguished.
As mentioned in the previous discussion, a void
Effect of novation on accessory obligation (Art. obligation is not the same as voidable obligation. A
1296) voidable obligation is valid until it has been annulled
by the court.
The rule is that the when principal obligation is
extinguished by virtue of novation, the accessory Example: Through violence, Karlo was able to buy
obligation attached to the said principal obligation the car of Tress. Karlo executed a promissory note
shall likewise be extinguished. Except when the stating that he will pay Tress the amount of
accessory obligation was constituted for the benefit P50,000.00. Tress did not bother to file an annulment
of the third persons who did not give their consent. of sale. Thereafter, Karlo offered to Tress to deliver
his Iphone worth P50,000.00 to which Tress
Example: Jolord owes Mimi P20,000.00 with 10% accepted. Is there a valid novation? Yes, since the
interest or P2,000.00. On the other hand, Mimi is old obligation, though voidable, was never annulled,
indebted to Pinky the amount of P2,000.00. the acceptance of Tress of the new obligation cures
Thereafter, Jolord, Mimi, and Pinky agreed that the defect of the old obligation, and therefore, the
Jolord will pay Pinky P2,000.00. new obligation to deliver the Iphone is valid.
Later on, Jolord and Mimi executed a contract Effect if the original obligation is subject to
whereby Jolord will deliver his E-bike in payment of conditional obligation either suspensive or
his obligation to Mimi amounting to P20,000.00. Is resolutory condition (Art. 1299)
Jolord still liable to pay P2,000.00 to Pinky?
If the original obligation is subject to suspensive or
It depends if Pinky did not give her consent to the resolutory condition, the new obligation shall be
novation made by Jolord and Mimi, Jolord's subjected to the same condition unless it is otherwise
obligation to pay Pinky P2,000.00 remains. On the agreed upon.
other hand, if Pinky consented on the novation,
Jolord's obligation to pay Pinky is extinguished. Simply stated, if the original obligation is conditional,
the new obligation or the novation must also be
Effect if the new obligation is void (Art. 1297) conditional.
If the new obligation which is intended to extinguish Example: Morris agreed to give Lizel his vintage car
the old obligation is void, then the original obligation with plate number 123 if the latter will pass the CPA
survives. This is logical because a void obligation board exam. Later, the parties agreed that instead of
produces no effect. Thus, the old obligation will vintage car, Morris would give a brand-new car
survive. The only exception is that unless the parties without stating any condition. Here even if the
intended that the former relation should be condition is not expressly stated in the new
extinguished in any event. obligation, the condition of passing the CPA board
Effect if the old obligation is void (Art. 1298) exam attaches because of the rule that the new
obligation shall be subject to the same condition as
In order that the new obligation will validly extinguish that of the original obligation, unless they stipulated
the old obligation, the latter must be a valid to disregard the condition.
obligation. If the old obligation is void then there is
nothing to novate. Thus, once the old obligation is Subrogation (Art. 1300)
void, the new obligation is likewise void. Subrogation has been defined as the transfer of all
the rights of the creditor to a third person, who
substitutes him in all his rights. It may either be legal Helga, Zeke is also indebted to JJ, his bestfriend, the
or conventional. amount of P5,000.00 only. Note that since Zeke's
obligation is burdened by mortgage, this is
Subrogation transfers to the persons subrogated the considered as preferred credit. JJ without the
credit with all the rights thereto appertaining, either knowledge of Zeke paid Zeke's debt of P50,000.00
against the debtor or against third person, be they to Helga. Here, there is a legal subrogation to the
guarantors or possessors of mortgages, subject to effect that JJ will be subrogated to the rights of Helga
stipulation in a conventional subrogation. which means that Zeke is now liable to JJ and in
Kinds of subrogation case Zeke failed to pay his obligation, JJ may
foreclose the chattel mortgage constituted on the car
1. Legal - is that which takes place without of Zeke.
agreement but by operation of law because of
certain acts.24 Legal subrogation is not 2. When a third person not interested in the
presumed, except in cases expressly obligation pays with the express or tacit approval of
mentioned under our Code. the debtor.
2. Conventional subrogation - is that which Example: Danna owes Grace P20,000.00 due on
takes place by agreement of parties. May 15, 2020. Seng, a third person, paid Grace
P20,000.00 with the consent of Danna. Here, Seng is
subrogated to the rights of Grace. This means that
Conventional Subrogation (Art. 1301) by Seng. whatever are the rights of Grace against
Danna can now be exercised
In conventional subrogation, it is essential that there
must be an agreement of all the parties to effect 3. When, even without the knowledge of the debtor, a
conventional subrogation. Conventional subrogation, person interested in the fulfillment of the obligation
therefore, cannot be implied but it must be clearly pays, without prejudice to the effects of confusion as
and expressly established. to the latter's share.
Distinctions between conventional subrogation Example: Danna owes Baby P10,000.00 secured by
and assignment of rights chattel mortgage. This debt is guaranteed by Mimi,
the guarantor. Note that Mimi here is a person
1. 1 In the conventional subrogation, the
interested in the fulfillment of the obligation because
consent of the debtor is necessary whereas
she will be affected if Mimi becomes insolvent. Thus,
in the assignment of rights, consent of the
if Mimi paid Baby even without the knowledge of
debtor is not necessary;
Danna. Mimi will be subrogated to all the rights of
2. Subrogation extinguishes an obligation and
Baby.
gives rise to a new one; assignment refers to
the same right which passes from one person Effect of Partial Subrogation (Art. 1304)
to another;
3. The nullity of an old obligation may be cured In case of partial payment of the obligation made by
by subrogation, such that the new obligation the new creditor to the original creditor, the latter
will be perfectly valid; but the nullity of an remains to be a creditor to the extent of the balance
obligation is not remedied by the assignment of the debt and that he shall be preferred in case the
of the creditor's right to another.25 original debtor shall subsequently become insolvent.

Legal Subrogation (Art. 1302) Example: Francis is indebted to James for

P10,000.00. Jobeets pays James P6,000.00 with the
As mentioned, legal subrogation is that which takes consent of Francis. Here there is a partial
place without agreement but by operation of law subrogation as to the amount of P6,000.00. As a
because of certain acts. Legal subrogation is not consequence, James remains to be a creditor as to
presumed, except in cases expressly mentioned the balance of P4,000.00.
under the Code.
Note, that due to partial payment made by Jobeets,
Cases where legal subrogation is presumed two obligations arise that is Francis to pay Jobeets
P6,000.00 and to James P4,000.00. In case Francis
1. When the creditor pays another creditor who is
becomes insolvent, James is preferred to Jobeets,
preferred even if without the debtor's knowledge.
meaning that James shall be paid first from the
Example: Zeke owes Helga P50,000.00 secured by a assets of Francis before paying Jobeets.
chattel mortgage on the car of Zeke. Aside from