Loss/Impossibility

Confusion/Merger of Rights
Compensation
Novation

Ilag, Carmelo John Ildefonso, Daryl

Merina, Patrick Villena, Eduardoughnut eat me
LOSS OF THE THING DUE
Concept
Not limited to obligations to give but extends to those which are personal, embracing therefore
all causes which may render impossible performance of the prestation.
Generally applies to determinate things
• Must be subsequent to the execution of the contract in order to extinguish the obligation
• If impossibility already existed when the contract was made, the result is not extinguishment
but inefficacy of the obligation under Art 1348 (impossible things or services cannot be
object of contracts) and Art 1493 (Sales; loss object of contract, contract without any
effect).
LOSS OF THE THING DUE
Kinds of Loss
• a. As to extent
TOTAL
PARTIAL
Requisites of Loss of the Thing Due
• Art 1262 In order to extinguish obligation:
1. Loss or destroyed without the fault of the debtor
2. Before the debtor incurs in delay
3. After the obligation is constituted
LOSS OF THE THING DUE
Presumption in Loss of the Thing Due
Art 1265
Whenever the thing is lost in the possession of the debtor, it shall be presumed that the loss
was DUE TO HIS FAULT, UNLESS there is proof to the contrary, and without prejudice to
the provisions of Art 1165.
Burden of explaining the loss of the thing in the possession of the debtor, rest upon him.
Art 1165
Action for specific performance or substituted performance When not applicable In case of
earthquake, flood, storm or other natural calamity.
Effects of Loss of the Thing Due
a. In obligation to give a specific thing
• Art 1262
Loss or destruction of determinate thing without fault of debtor AND before he incurs in delay EXTINGUISHES
OBLIGATION
• Art 1268
When the debt of a thing certain and determinate proceeds from a criminal offense , the debtor shall NOT BE EXEMPTED
from the payment of its price, whatever may be the cause for the loss , UNLESS the thing having been offered by him to the
person who should receive it, the latter refused without justification to accept it.
• EXCEPTIONS:
1. Debtor is at fault i.e. in bad faith, negligence, delay
2. Debtor is made liable for fortuitous event by law, contractual stipulation or nature of obligation requires assumption of
risk on part of debtor
Effects of Loss of the Thing Due
b. In obligation to give a generic thing not extinguished
• Art 1263
In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does not
extinguish the obligation.
• EXCEPTIONS:
1. Delimited generic things: limitation of the generic object to a particular existing mass or a particular
group of things; become determinate objects whose loss extinguishes the obligation
2. Generic thing has been segregated
3. 3. Monetary obligation
Effects of Loss of the Thing Due
c. In case of partial loss
• Art 1264
The courts shall determine whether, under the circumstances, the partial loss of the object of
the obligation is so important as to extinguish the obligation.
 Provided that partial loss is not imputable to the fault or negligence of the debtor but to
fortuitous events or circumstances
 Intention of the parties is the controlling factor in the solution of each case of partial loss
E.g. When Eduardo bit off Eduardino’s ear which did not undermine the latter’s boxing
prowess
Effects of Loss of the Thing Due
d. Action against third persons
Art 1269
The obligation having been extinguished by the loss of the thing , the creditor shall have all
rights of action which the debtor may have against third person by reason of the loss.
 Refers not only to the rights and actions which the debtor may have against third
persons but also to any indemnity which the debtor may have already received.
 E.g. money paid to the debtor upon expropriation of the property which is the
object of obligation; insurance received by owner of company with respect to
victims of sunk vessel
 IMPOSSIBILITY OF PERFORMANCE
Concept
• Art 1266
The debtor in obligations to do shall also be released when the prestation becomes legally or physically impossible without the
fault of the obligor. Refers to SUBSEQUENT IMPOSSIBILITY arises AFTER the obligation has been constituted. If
existing BEFORE, the obligation constituted is under VOID contracts
• Art 1267
When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be
released therefrom, in whole or in part. Doctrine of unforeseen events, rebus sic stantibus : the parties stipulate in the light of
certain prevailing conditions, and once these conditions cease to exist, the contract also ceases to exist. Requisites for application
of Art 1267
• 1. Event or change in circumstances could not have been foreseen at the time of the execution of the contract
• 2. Makes the performance of the contract extremely difficult but not impossible 3. Event must not be due to the act of any
of the parties 4. Contract is for a future prestation
Kinds of Impossibility
1. As to extent
• TOTAL
• PARTIAL significant in Art 1264 (extinguishment due to partial loss subject to the court s
determination)
2. As to source
• LEGAL
• a. Direct prohibited by law
• b. Indirect prevented by supervening legal duty such as military service
• PHYSICAL By reason of its nature, cannot be accomplished
Requisites of Impossibility
Art 1266
• 1. Obligation used to be possible at the constitution of obligation
• 2. Subsequent impossibility
• 3. Without the fault of the debtor
Effects of Impossibility
a. In obligations to do Art 1266 releases debtor from obligation if presentations has become legally or physically impossible
b. Art 1267 releases debtor if performance has become so difficult to be so manifestly beyond the contemplation of the parties
c. Art 1262 Par 2 (by analogy) Impossibility due to fortuitous events does not extinguish obligation if:
o By law
o By stipulation
o Nature of the obligation requires assumption of risk
• In case of partial performance by the debtor : creditor must pay the part done so long as he benefits from such partial
compliance.
• If debtor received anything from creditor prior to loss or impossibility: return anything in excess of what corresponds to the
part already performed when the impossibility supervened.
• Impossibility vs. Difficulty Manifest disequilibrium in the presentations, such that one party would be placed at a disadvantage
by the unforeseen event.
Confusion or Merger of Rights
Concept
Merger or confusion is the meeting in one person of the qualities of the creditor and the debtor with
respect to the same obligation.
 Erases the plurality of subjects of the obligation and extinguishes the obligation because it
is absurd that a person should enforce an obligation against himself.
 May be revoked, as a result of which the obligation is recreated in the same condition that it
had when merger took place
 CAUSE OF MERGER: Anything that brings about succession to the credit e.g. debtor
inherits credit from the creditor. However, cannot be the other way around because under
the present law, heirs do not inherit the debts of their predecessors.
Requisites for Confusion
1. Must take place between the creditor and the principal debtor (Art 1276)
2. Very same obligation must be involved, for if the debtor acquires rights
from the creditor, but not particular obligation in question, there will be no
merger
3. Confusion must be total or as regards the entire obligation
Effects of Confusion
1. In general extinguish the obligation
2. In case of
 Joint obligations - Art 1277 Confusion does not extinguish a joint obligation EXCEPT
as regards the share corresponding to the creditor or debtor in whom the two
characters concur
 Solidary obligations Art 1215 confusion made by any of the solidary creditors or with
any of the solidary debtors shall extinguish the obligation , without prejudice to the
provisions of Art 1219. (Solidary co-debtor who has been remitted is still liable to co-
debtors if one of the had paid the obligation in full prior the remission)
Confusion in Principal or Accessory Obligation

Art 1276
Merger which takes place in the person of the principal debtor or creditor benefits the
guarantors. Confusion which takes place in the person of any of the latter does not extinguish
the obligation.
 Merger releases the guarantor because they are merely accessory obligations
 Guarantor acquires the credit, his obligation as guarantor is extinguished, but the principal
obligation subsists which he can enforce against the debtor and other co-guarantors.
 When mortgaged property belongs to a third person, mortgagee acquires a part of the
property, the same is released from the encumbrance. The obligation merely becomes a
partly (if the acquisition is not total) unsecured obligation.
Compensation
• Concept It is a mode of extinguishing the obligation to the concurrent amount, the
obligations of those persons who in their own right are reciprocally debtors and creditors of
each other. Abbreviated payment
• Offsetting of two obligations which are reciprocally extinguished if they are of equal value
or extinguished to the concurrent amount if of different values.
• Balancing between two obligations, involves a figurative operation of weighing two
obligations simultaneously in order to extinguish them to the extent in which the amount of
one is covered by the other.
• Payment is simplified and assured between persons who are indebted to each other.
• Although it takes place by operation of law, it must be alleged and proved by the debtor
who claims its benefits. Once proved, its effect retroacts to the moment when the requisites
provided by law concur.
Compensation
Concept
It is a mode of extinguishing the obligation to the concurrent amount, the obligations of those persons
who in their own right are reciprocally debtors and creditors of each other.
 Offsetting of two obligations which are reciprocally extinguished if they are of equal value
or extinguished to the concurrent amount if of different values.
 Balancing between two obligations, involves a figurative operation of weighing two
obligations simultaneously in order to extinguish them to the extent in which the amount of
one is covered by the other.
 Payment is simplified and assured between persons who are indebted to each other.
 Although it takes place by operation of law, it must be alleged and proved by the debtor
who claims its benefits. Once proved, its effect retroacts to the moment when the requisites
provided by law concur.
Distinguished from payments
PAYMENT COMPENSATION
• Capacity to dispose of the thing paid and capacity to receive are required for
debtor and creditor
• Such capacity is not necessary, because it takes place by operation of law and
not by the acts of parties
• Performance must be complete
• There may be partial extinguishment of an obligation
Distinguished from payments
CONFUSION COMPENSATION
• Involves only one obligation
• There must always be two obligations
• There is only one person in whom the characters of creditor and debtor
meet
• Two persons who are mutually debtors and creditors of each other in two
separate obligations, each arising from a different cause
Advantage of Compensation over Payment
1. Simple, taking effect without action by either party to extinguish their
respective obligations
2. More guaranty in making the credit effective, because there is less risk of
loss by the creditor due to insolvency or fraud of the creditor
Art 1278
Compensation shall take place when two persons, in their own right are creditors and
debtors of each other.
Kinds of Compensation
1. As to extent
TOTAL when two obligations are of the same amount
PARTIAL when the amounts are not equal
2. As to origin
LEGAL takes place by operation of law because all the requisites are present
VOLUNTARY/CONVENTIONAL when the parties agree to compensate their
mutual obligations even if some requisite is lacking, such as that provided in Art 1282
Kinds of Compensation
Art 1279
Requisites of legal compensation is inapplicable
Art 1282
The parties may agree upon the compensation of debts which are not yet due.

Requisites of Voluntary Compensation

1. Each of the parties can dispose of the credit he seeks to compensate
2. They agree to the mutual extinguishment of their credits
Kinds of Compensation
JUDICIAL
when decreed by the court in a case where there is a counterclaim e.g. defendant is the creditor of
the plaintiff for an unliquidated amount, sets up his credit as a counterclaim against the plaintiff
and his credit is liquidated by judgment, thereby compensating it with the credit of the plaintiff.
Legal compensation is not possible because the claim is unliquidated
• 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 it off by proving his right to said damages and the amount thereof.
Kinds of Compensation
FACULTATIVE
when it can be claimed by one of the parties who, however, has the right to object to it, such as
when one of the obligations has a period for the benefit of one party alone and who renounces
that period so as to make the obligation due
• When legal compensation cannot take place for want of some legal requisites
• As compared with conventional: facultative is unilateral, while conventional depends upon
agreement of both parties
Kinds of Compensation
• FACULTATIVE when it can be claimed by one of the parties who, however, has
the right to object to it , such as when one of the obligations has a period for the
benefit of one party alone and who renounces that period so as to make the
obligation due
• When legal compensation cannot take place for want of some legal requisites
• As compared with conventional: facultative is unilateral, while conventional depends upon
agreement of both parties
Legal Compensation
Requisites for Legal compensation (Art 1279)
In order that compensation may be proper, it is necessary that:
1. Each one of the obligors be bound principally and that at the same time a principal creditor
of the other
Principals not applicable if only a guarantor
Solidary debtor cannot set up the obligation of the creditor in favor of a co-debtor, except as regards the
share of the latter
2. That both debts consists in a sum of money , or if the things due are consumable, they be of
the same kind and also of the same quality if the latter has been stated
3. That the two debts are due
Legal Compensation
4. That they be liquidated and demandable
• Liquidated debts when its existence and amount are determined
• Demandable - enforceable in court
What are not subject to compensation:
• Period which has not yet arrived
• Suspensive condition has not yet happened
• Obligation cannot be sued upon (e.g. natural obligation)
5. That over neither of them there be any retention or controversy , commenced by third persons
and communicated in due time to the debtor
• Not applicable to facultative obligations, but applicable to those with penal clause
Legal Compensation
Art 1280
Notwithstanding the provisions of the preceding article, the guarantor may set up compensation
as regards what the creditor may owe the principal debtor.
Liability of the guarantor is only subsidiary; it is accessory to the principal
obligation of the debtor
If debtor s obligation is compensated, it would mean the extinguishment of the
guaranteed debt and benefits the guarantor
Sample Case: Silahis Marketing Corp vs IAC
FACTS:
• On various dates in October, November and December, 1975, Gregorio de Leon doing business under the name
and style of Mark Industrial Sales sold and delivered to Silahis Marketing Corporation, and its president Jose Taylo
various items of merchandise covered by several invoices in the aggregate amount of P22,213.75 payable within
thirty (30) days from date of the covering invoices. Allegedly due to Silahis’ failure to pay its account upon maturity
despite repeated demands, de Leon filed a complaint for the collection of the said accounts including accrued
interest thereon in the amount of P661.03 and attorney’s fees of P5,000.00 plus costs of litigation. The answer
admitted the allegations of the complaint insofar as the invoices were concerned but presented as affirmative
defenses; [a] a debit memo for P22,200.00 as unrealized profit for a supposed commission that Silahis should have
received from de Leon for the sale of sprockets in the amount of P111,000.00 made directly to Dole Philippines,
Incorporated by the latter sometime in August 1975; and [b] Silahis’ claim that it is entitled to return the stainless
steel screen which was found defective by its client, Borden International, Davao City, and to have the
corresponding amount cancelled from its account with de Leon.
ISSUE:
• Whether or not the commissions be regarded as a valid compensation.
RULING:
• It must be remembered that compensation takes place when two persons, in their own right, are creditors and
debtors to each other. Article 1279 of the Civil Code provides that: “In order that compensation may be proper, it
is necessary: [1] that each one of the obligors be bound principally, and that he be at the same time a principal
creditor of the other; [2] that both debts consist in a sum of money, or if the things due are consumable, they be
of the same kind, and also of the same quality if the latter has been stated; [3] that the two debts be due; [4] that
they be liquidated and demandable; [5] that over neither of them there be any retention or controversy, commenced
by third persons and communicated in due time to the debtor.”
• Undoubtedly, petitioner admits the validity of its outstanding accounts with private respondent in the amount of
P22,213.75 as contained in its answer. But whether the private respondent is liable to pay the petitioner a 20%
margin or commission on the subject sale to Dole Philippines, Inc. is vigorously disputed. This circumstance
prevents legal compensation from taking place.
• The Court agrees with respondent appellate court that there is no evidence on record from which it can be inferred
that there was an agreement between the petitioner and private respondent prohibiting the latter from selling
directly to Dole Philippines, Incorporated. Definitely, it cannot be asserted that the debit memo was a contract
binding between the parties considering that the same, as correctly found by the appellate court, was not signed by
private respondent nor was there any mention therein of any commitment by the latter to pay any commission to
the former involving the sale of sprockets to Dole Philippines, Inc. in the amount of P111,000.00. Indeed, such
document can be taken as self-serving with no probative value absent a showing or at the very least an inference,
that the party sought to be bound assented to its contents or showed conformity thereto.
 Sample Case: BPI vs Reyes
Respondent explained that she is withdrawing the amount of P100,000.00 only and then changed and correct the figure
two (2) into one (1) with her signature super-imposed thereto signifying the change, afterwhich the amount of P100,000.00
in cash in two bundles containing 100 pieces of P500.00 peso bill were given to Capati with her daughter Joan witnessing
the same. Thereafter Capati prepared a deposit slip for P200,000.00 in the name of resondent Jesusa Reyes with the new
account no. 0235-0767-48 and brought the same to the teller's booth.
After a while, he returned and handed to the respondent her duplicate copy of her deposit to account no. 0235-0767-48
reflecting the amount of P200,000.00 with receipt stamp showing December 7, as the date.
Later on, respondent would become aware that her ATM account only contained the amount of P100,000.00 with interest.
Hence, she filed an action before the RTC.
Petitioner claimed that there was actually no cash involved with the transactions which happened on December 7, 1990 as
contained in the bank’s teller tape.
On August 12, 1994, the RTC issued a Decision upholding the versions of respondents.
Aggrieved, petitioner appealed to the CA which affirmed the RTC decision with modification
 Sample Case: BPI vs Reyes
Respondent explained that she is withdrawing the amount of P100,000.00 only and then changed and correct the figure
two (2) into one (1) with her signature super-imposed thereto signifying the change, afterwhich the amount of P100,000.00
in cash in two bundles containing 100 pieces of P500.00 peso bill were given to Capati with her daughter Joan witnessing
the same. Thereafter Capati prepared a deposit slip for P200,000.00 in the name of resondent Jesusa Reyes with the new
account no. 0235-0767-48 and brought the same to the teller's booth.
After a while, he returned and handed to the respondent her duplicate copy of her deposit to account no. 0235-0767-48
reflecting the amount of P200,000.00 with receipt stamp showing December 7, as the date.
Later on, respondent would become aware that her ATM account only contained the amount of P100,000.00 with interest.
Hence, she filed an action before the RTC.
Petitioner claimed that there was actually no cash involved with the transactions which happened on December 7, 1990 as
contained in the bank’s teller tape.
On August 12, 1994, the RTC issued a Decision upholding the versions of respondents.
Aggrieved, petitioner appealed to the CA which affirmed the RTC decision with modification
Effects of Legal Compensation
1. Both debts are extinguished to the concurrent amount (Art 1290)
2. Interests stop accruing on the extinguished obligations or the part extinguished
3. Period of prescription stops with respect to the obligation or part extinguished
4. All accessory obligations of the principal which has been extinguished are also
extinguished
5. If a person should have against him several debts which are susceptible of
compensation, the rules on application of payments shall apply to the order of
the compensation. (Art 1289)
Effects of Legal Compensation
Art 1287
Compensation shall not be proper when one of the debts arises from a depositum or from the
obligations of a depositary or of a bailee in a commodatum. Neither can compensation be set up
against a creditor who has a claim for support due by gratuitous title, without prejudice to the
provisions of Art 301 (support in arrears can be compensated).
 Why? A deposit is made or a commodatum is given on the basis of confidence of the owner. It is
therefore, just that the depositary or borrower should in fact perform his obligation; otherwise the
trust of the depositor or lender would be violated.
Art 1288
Neither shall there be compensation if one of the debts consists in civil liability arising from a penal
offense .
 Why? Satisfaction of such obligation is imperative
Effects of Legal Compensation
No compensation may occur even when all the requisites concur :
• 1. When there is renunciation of the effects of compensation by a party rests
upon a potestative right and unilateral declaration of renunciation is sufficient
• 2. When the law prohibits compensation
a. Art 1287 one of the debts arises from a depositum or from the obligations of a
depositary or a bailee in commodatum. Claim for support due by gratuitous title, without
prejudice to the provisions of 2nd Paragraph, Art 3012
b. Art 1288 civil liability arising from a penal offense
Effects of Legal Compensation
Compensation of debts payable in different places
• Art 1286 Compensation takes place by operation of law , even though the
debts may be payable at different places, but there shall be an indemnity
for expenses of exchange or transportation to the place of payment.
• Applies to legal compensation but not to voluntary compensation
Effects of Nullity of debts to be compensated
• Art 1284 When one or both debts are rescessible or voidable, they may be
compensated against each other BEFORE they are judicially rescinded or
avoided.
Effects of Assignment of Credit
A. Made AFTER compensation took place: no effect; compensation already
perfected, nothing to assign at all
Assignee is left with an action for eviction or for damages for fraud against
assignor
Effects of Assignment of Credit
B. Made BEFORE compensation took place
• 1. With consent of debtor cannot set up against assignee UNLESS debtor
reserved his right to compensation when he gave his consent
Art 1285 Par 1
The debtor who has consented to the assignment of rights made by a creditor in favor of
a third person, cannot set up against the assignee the compensation which would
pertain to him against the assignor, UNLESS the assignor was notified by the debtor at the
time he gave his consent, that he reserved his right to the compensation.
Effects of Assignment of Credit
B. Made BEFORE compensation took place
• 2. With knowledge but without consent of debtor only debts prior to
assignment, not subsequent
Art 1285 Par 2
If the creditor communicated the cession to him but the debtor did not consent thereto,
the latter may set up the compensation of debts previous to the cession , but not of
subsequent ones.
Effects of Assignment of Credit
B. Made BEFORE compensation took place
• 3. Without the knowledge of debtor all debts maturing prior to his
knowledge
Art 1285 Par 3
If the assignment is made without the knowledge of the debtor, he may set up the
compensation of all credits prior to the same and also later ones until he had
knowledge of the assignment.
• Rationale : As far as the debtor is concerned, the assignment does not take effect except
from the time he is notified thereof.
Novation
• Concept The extinguishment of an obligation by the substitution or change of the
obligation by a subsequent one which extinguishes or modifies the first either by:
1. Changing the object or principal conditions
2. Substituting the person of the debtor
3. Subrogating a third person in the rights of the creditor
• Unlike other acts of extinguishing obligation, novation is a juridical act of dual
function in that at the time it extinguishes an obligation, it creates a new one in lieu
of the old. Does not operate as absolute but only as a relative extinction.
Novation
Art 1291 Obligations may be modified by:
• 1. Changing the object or principal conditions
• 2. Substituting the person of the debtor
• 3. Subrogating a third person in the rights of the creditor
Kinds of Novation
1. As to form
EXPRESS parties declare that the old obligation is extinguished and substituted by
the new obligation
IMPLIED incompatibility between the old and the new obligations that they
cannot stand together
2. As to origin
CONVENTIONAL by express stipulation of the parties
LEGAL by operation of law
Kinds of Novation
3. As to object
OBJECTIVE/REAL change in the cause, object or principal
SUBJECTIVE/PERSONAL modification of obligation by the change of the subject
passive - substitution of debtor
active - subrogation of a third person in the rights of the creditor
MIXED both objective and subjective novation
4. As to effect
PARTIAL only a modification or change in some principal conditions of the obligation
TOTAL obligation is completely extinguished
 Kinds of Novation
Art 1292 In order that obligation may be extinguished by another which substitutes the same, it is imperative
that
1. It be so declared in unequivocal terms (express)
2. Old and the new obligations be on every point incompatible with each other (implied) Novation is
not presumed
Express novation: expressly disclose that their object in making the new contract is to extinguish the old
contract Implied novation: no specific form is required, all that is needed is incompatibility between original
and subsequent contracts
Test of incompatibility: If the two contracts can stand together and each one having independent existence
The change must refer to the object, the cause or the principal conditions of the obligations. Accidental
changes do not produce novation.
 Requisites of Novation
1. Previous valid obligation
2. The agreement of all parties to the new contract
3. Extinguishment of the old contract
4. Validity of the new one
5. Animus novandi or intent to novate (especially for implied novation and
substitution of debtors)
 Sample Case: Broadway CCC vs Tropical Hut
FACTS:
• Broadway agreed to lease a portion of the Broadway Centrum Commercial Complex to Tropical Hut for a period of 10
years with rental rates as follows: 1st 3 years (Feb 1 1981 to Feb 1 1984) : Php120,000; 2nd 3 years (Feb 1 1984 to Feb 1
1987) : Php140,000; Last 4 years (Feb 1 1987 to Feb 1 1991) : Php165,000. There were no problems during the first
year of lease, but on 1982 Tropical Hut requested for a rental rate reduction due to financial difficulties. Tropical Hut is
paying a rental rate of 6.08% of sales “which is too high for Tropical Hut-Broadway considering that the present rental
rates of other Tropical branches are even below the normal rate of 1.5% on sales.”
• Negotiations between Broadway Centrum and Tropical Hut representatives were made. Broadway agreed to a
“provisional and temporary agreement” wherein Tropical will pay a monthly rental on the basis of 2% of gross receipts
or P60,000.00, whichever is higher. After a few months, Broadway sent Tropical a letter returning the old rental rates.
Tropical requested that the reduced rental scheme be maintained but Broadway did not agree and sought to enforce the
original contract details. Tropical Hut filed for a writ of prohibition against Broadway.
 Sample Case: Broadway CCC vs Tropical Hut

ISSUE:
• Whether or not the agreement novated the Contract of Lease.
 Sample Case: Broadway CCC vs Tropical Hut
RULING:
• No. If objective novation is to take place, it is essential that the new obligation expressly declare that the old obligation
to be extinguished, or that now obligation be on every point incompatible with the old one. Novation is never
presumed; it must be established either by the discharge of use old debt by the express terms of the new agreement or
by the acts of the parties whose intention to dissolve the old obligation as a consideration of the emergence of the
new one must be clearly manifested.
• In the case at hand, the letter-agreement was, by its own terms, a ” provisional and temporary agreement to a reduction
of [Tropical’s] monthly rental —.” The non-specification by Broadway of the period of time during which the reduced
rentals would remain in effect, only meant that Broadway retained for itself the discretionary right to return to the
original contractual rates of rental whenever Broadway felt it appropriate to do so. The formal notarized Lease
Contract made it clear that a temporary and provisional concessional reduction of rentals which Broadway might grant
to Tropical was not to be construed as alteration or waiver of any of the terms of the Lease Contract itself. The course
of negotiations between Broadway and Tropical clearly indicated that what they were negotiating was a temporary and
provisional reduction of rentals only and was not to persist for the rest of the life of the ten (10)-year Contract of
Lease
 Effects of Novation
1. In general extinguishment of the original obligation and creation of a new one
2. When accessory obligation may subsist only insofar as they may benefit third
person who did not give the consent to the novation
• why? Mortgage, pledge, guaranty was given to any for a particular obligation or for the
insolvency of a particular debtor; any change in either of this destroys the basis of the
consent of the mortgagor, pledgor, surety or guaranty
 Effect of the Status of the Original or the New
Obligation
• Nullity of the original obligation
• new obligation is VOID
• One of the requisites of novation is a previous valid obligation
• Also applies to voidable that are already annulled/extinguished
• Voidability of the original obligation
new obligation is VALID if ratified before novation
new obligation is VALID even if not ratified, but voidable at the instance of the debtor
Consent of debtor constitutes implied waiver of the action for nullity
Defect is not completely cured in expromision wherein debtor has not intervened or consented

 Art 1298 The novation is void if the original obligation was void, except when annulment may
be claimed only by the debtor, or when ratification validates acts which are voidable.
 Effect of the Status of the Original or the New
Obligation
• Nullity of the new obligation, original SUBSISTS, UNLESS intends
extinguishment of former in any event
• Voidability of the new obligation
• new obligation is VALID
• y BUT if new obligation is annulled and set aside, original SUBSISTS
• Art 1297 If the new obligation is void, the original one shall subsist, unless the
parties intended that the former one shall be extinguished in any event.
 Effect of the Status of the Original or the New
Obligation
• Suspensive or resolutory condition of original obligation New is pure
If intention is merely to suppress the condition, no novation
If intention is extinguish the original obligation itself by the creation of a new obligation, the novation
does not arise except from fulfillment of the condition from original obligation.
• Where the original obligation is conditional, novation itself must be held to be conditional also and its
efficacy depends upon whether the condition which affects the former is complied with or not
• Suspensive condition of the original not performed, obligation does not come into existence, cause for
the new obligation is wanting
• Resolutory condition, same category as void obligation or one which has been extinguished
 Effect of the Status of the Original or the New
Obligation
• Original obligation is pure. New obligation is conditional
• If the intention is merely to attach the condition to the original obligation, there is no novation .
• If the new conditional obligation is intended to substitute the original and pure obligation,
novation (and consequent extinguishment of the original) is subject to the condition.
• Pending the happening of the condition, the old obligation is enforceable
• Art 1299 If the original obligation was subject to a suspensive or resolutory
condition, the new obligation shall be under the same condition, unless it is
otherwise stipulated.
 Objective Novation
Change in the object of prestations.
 PRINCIPAL CONDITIONS - principal conditions or terms (e.g. making the debt
absolute instead of conditional and vice-versa)
 Dacion en pago is an objective novation
 Increase in amount and you can prove that the intention to novate, then it will be an implied
novation, but usually, it s not a novation if you change the amount.
 Extension of time does not imply novation. But if the time situation is reversed (shortening of
the period), that is a novation.
 Conversion of an obligation to some other obligation e.g. obligation for contract of deposit for
one of loan, or a contract of deposit to one of commodatum.
 Subjective Novation
In all kinds of subjective novation, the consent of the creditor is required.
1. By change of debtor
• CONSENT OF THE THIRD PARTY ALWAYS REQUIRED. Why? Because he assumes the obligation
• CONSENT OF THE CREDITOR IS LIKEWISE INDISPENSABLE. Why? Substitution of one debtor for another may delay or
prevent the fulfillment of the obligation by reason of the inability or insolvency of the new debtor
 Consent may be implied or express as long as it is given.
 However, it cannot be presumed from his acceptance of payments by a 3rd party for the benefit of the debtor without further acts; no novation
because no consent to the transfer of the debt itself
• It is not enough to extend the juridical relation to a 3rd person, it is necessary that the old debtor be released from the obligation and the
3 rd person or new debtor takes his place.
• Without the release, there is no novation, the person who assumed the obligation of the debtor merely becomes a co-debtor or a surety
• No agreement to solidarity, the first and the new debtor are considered obligated jointly.
a. EXPROMISION
• - May be done at the instance of the creditor or the third party himself
 Subjective Novation
Requisites of Expromision
• Consent of two parties (new debtor and creditor)
• Knowledge or consent of the debtor is not required

Art 1293
Novation which consists in substituting a new debtor in the place of the original one, may be
made even without the knowledge or against the will of the original debtor, but not without the
consent of the creditor. Payment by the new debtor gives him the rights mentioned in Art 1236
and Art 1237.
 Subjective Novation
Art 1236 Par 2
Whoever pays for another may demand from the debtor what he has paid , except that if he
paid without the knowledge or against the will of the debtor, he can recover only insofar as the
payment has been beneficial to the debtor.
Art 1237
Whoever pays on behalf of the debtor without the knowledge or against the will of the latter,
cannot compel the creditor to subrogate him in his rights, such as those arising from a
mortgage, guaranty, or penalty.
 Subjective Novation
Effects of Expromision
• The debtor is released from obligation
• Creditor generally cannot recourse from the old debtor if the new debtor is insolvent
• If substitution is without his knowledge or consent
a. Old debtor is not liable for the insolvency or non-fulfillment of the new debtor (Art 1294)
b. The new debtor can only compel old debtor to reimburse inasmuch as the payment has been beneficial to him No subrogation takes place (Art 1237)
• If substitution is with knowledge and consent
a. New debtor is entitled to full reimbursement of the amount paid and subrogation

Art 1294
• If the substitution is without the knowledge or against the will of the debtor, the new debtor’s insolvency or non-fulfillment of the
obligation shall NOT give rise to any liability on the part of the debtor.
 Subjective Novation
b. DELEGACION
• Debtor offers and the creditor accepts a third person who consents to the
substitution so that the consent of the three is necessary
 Delegante (old debtor)
 delegatario (creditor)
 and delegado (third person new debtor)
 Subjective Novation
Requisites of Delegacion (vs. Art 1293 )
• Initiative for substitution must emanate from the old debtor
• Consent of the new debtor
• Acceptance by the creditor
Effects of Delegacion
• Original debtor is released from the obligation
• The new debtor is subrogated in the rights of the creditor. He may demand from the old debtor the entire amount of what he has paid for the obligation.
(Art 1302 Par 2)
• GENERAL RULE: Old debtor is not liable for the insolvency or non-fulfillment of the new debtor (Art 1295)
EXCEPTION:
• i. He is aware of the insolvency at the time he delegated his debt (Art 1295)
• ii. At the time of the delegation, the new debtor s insolvency is already existing and of public knowledge (Art 1295)
• Art 1295 The insolvency of the new debtor who has been proposed by the original debtor and accepted by the creditor shall NOT REVIVE the action
of the latter against the original obligor, EXCEPT when said insolvency was already existing and of public knowledge OR known to the debtor when
he delegated his debt .
 Subjective Novation
2. By change of creditor: subrogation of a third person in the rights of the
creditor
• Art 1300 Subrogation of a third person in the rights of a creditor is either legal or
conventional. The former is not presumed, except in cases expressly mentioned in
this Code; the latter must be clearly established in order that it may take effect.
• The transfer of all the rights of the creditor to a third person who substitutes him in
all his rights.
a. CONVENTIONAL SUBROGATION
• - Takes place by agreement of the parties
 Subjective Novation
Requisites of Conventional Subrogation (Art 1301)
• 1. Consent of the old creditor because his right is extinguished
• 2. Consent of the debtor old is extinguished and he becomes liable to a new obligation
• 3. Consent of the third person new creditor becomes a party to the new relation

Distinguished from Assignment of Credits

CONVENTIONAL SUBROGATION ASSIGNMENT OF CREDITS
• Debtor s consent is necessary
• Debtor s consent not required
• Extinguishes the old obligation and gives rise to a new one
• Refers to the same right which passes from one person to another
• The nullity of an old obligation may be cured by subrogation such that the new obligation will be perfectly valid
• Nullity of an obligation is not remedied by the assignment of the creditor s right to another
 Effects of Conventional Subrogation
Art 1303
Subrogation transfers to the person subrogated the credit with all the rights thereto
appertaining, either against the creditor or against third persons, be they guarantors or possessors
of mortgages, subject to stipulation in a conventional subrogation.
• If suspensive condition is attached, that condition must be fulfilled first in order the new creditor may
exercise his rights.

Art 1304
A creditor, to whom partial payment has been made, may exercise his right for the remainder
and he shall be preferred to the person who has been subrogated in his place in virtue of the
partial payment of the same credit
 Sample Case: Licaros vs Gatmaitan
Facts
• The Anglo-Asean Bank is a bank somewhere in Cat Heaven which receive fund placements from different parts of the world and invest such deposits in
money market placements in HK, Europe and the United States.
• Licaros decided to make a fund placement (USD 150K) with said bank sometime in the 1980's. Licaros encountered tremendous difficulties in retrieving the
investments he had put in.
• Licaros then decide to seek the counsel of Antonio P. Gatmaitan (banker). Gatmaitan voluntarily offered to assume the payment of Anglo-Asean's
indebtedness to Licaros subject to certain terms and conditions. The two executed a notarized MOA. Gatmaitan presented to Anglo-Asean the MOA for the
purpose of collecting. No formal response was ever made by said bank.
• Gatmaitan did not bother anymore to make good his promise to pay Licaros the PN. Licaros felt that he had a right to collect on the basis of the PN
regardless of the outcome of Gatmaitan's recovery efforts.
Issue:
• Whether the MOA is one of assignment of credit or one of conventional subrogation.
Lower courts:
• RTC found Gatmaitan liable under the MOA and PN for P3,150K plus 12% interest pa. (assignment of credit.
• CA reversed and held that Gatmaitan did not at any point become obligated to pay to Licaros the amount stated in the PN. (conventional subrogation)
 Legal Subrogation
b. LEGAL SUBROGATION
• Takes place without agreement but by operation of law because of certain acts
• GENERAL RULE: Not presumed, EXCEPTION: Art 1302
• The third person is called legal subrogee
Requisites of Legal Subrogation
• When is Legal Subrogation presumed
Art 1302 It is presumed that there is legal subrogation:
• 1. When a creditor pays another creditor who is preferred, even without the debtor s knowledge
• Debtor can still use any defenses he may have against the original creditor such as compensation
• 2. When a 3rd person, not interested in the obligation, pays with the express/tacit approval of the debtor
• 3. When, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation pays, without prejudice to the effects of
confusion as to the latter’s share
• Solidary co-debtor may reimburse to the extent of the debtor s share
• Guarantors, mortgagors and sureties
 Legal Subrogation
b. LEGAL SUBROGATION
• Takes place without agreement but by operation of law because of certain acts
• GENERAL RULE: Not presumed, EXCEPTION: Art 1302
• The third person is called legal subrogee
Requisites of Legal Subrogation
• When is Legal Subrogation presumed
Art 1302 It is presumed that there is legal subrogation:
• 1. When a creditor pays another creditor who is preferred, even without the debtor s knowledge
• Debtor can still use any defenses he may have against the original creditor such as compensation
• 2. When a 3rd person, not interested in the obligation, pays with the express/tacit approval of the debtor
• 3. When, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation pays, without prejudice to the effects of
confusion as to the latter’s share
• Solidary co-debtor may reimburse to the extent of the debtor s share
• Guarantors, mortgagors and sureties
 Legal Subrogation
Effects of Legal Subrogation
• Art 1303 Subrogation transfers to the person subrogated the credit with all the
rights thereto appertaining, either against the creditor or against third persons, be
they guarantors or possessors of mortgages, subject to stipulation in a conventional
subrogation.
• If suspensive condition is attached, that condition must be fulfilled first in order the new
creditor may exercise his rights.
• Art 1304 A creditor, to whom partial payment has been made, may exercise his
right for the remainder and he shall be preferred to the person who has been
subrogated in his place in virtue of the partial payment of the same credit.