Extinguishment

of Obligations
 ART. 1231. Obligations are
extinguished:

[Link] payment or performance;

[Link] the loss of the things due;

debt
[Link] the condonation or remission of ;
the

[Link] the confusion or merger of the

rights of creditor and debtor;

[Link] compensation;
Othernovation;
[Link] causes of extinguishment of obligations,
such as annulment, rescission, fulfillment of a resolutory
condition, and prescription, are governed elsewhere in
this Code. (Art. 1231, N C C )
Causes of
extinguishment of
obligations
In addition to those enumerated in Article 1231, other causes
are:

1. Death of a party in case the obligation is a personal one;

(Art. 1311, par. 1)
2. Mutual desistance or withdrawal. Where after the approval
of his loan, the borrower, instead of insisting for its release,
asked that the mortgage given by him as security b e
cancelled a n d the creditor (DBP) a c c e d e d thereto, the
action thus taken by both parties was in the nature of mutual
d esista n c e which is a m o de of extinguishing obligations. It is
a concept that derives from the principle that since mutual
agreement c a n create a contract, mutual disagreement by
the parties c a n cause its extinguishment; (see Saura Import &
Export Co., Inc. v DBP., 44 SC RA 445; see Art. 1308)
Causes of
extinguishment of
obligations
[Link] of resolutory period; (Art. 1193,
par. 2)
4. Compromise; (Art. 2028, N C C )
5. Impossibility of fulfillment; (Art. 1266,
NCC)
[Link] of a fortuitous event.
(Art. 1174, N C C )
These causes as well as those
enumerated in the second
paragraph of Article 1231 are
Payment or

Performanc
e
 ART. 1232.
Payment means not
only the delivery of
money but also the
performance, in any
other manner, of an
obligation. (Art. 1232,
NCC)
Mean in g of
Payment
In ordinary parlance, payment refers
only to the delivery of money. As a m o d e
of extinguishing a n obligation, it has a
much wider meaning.
Payment m a y consist of not only in the
delivery of money but also the giving of a
thing (other than money), the d o n g of a n
act, or not doing of a n act. When a debtor
pays d a m a g e s or penalty in lieu of the
fulfillment of a n obligation, there is also
payment in the sense used in Article 1232.
In law, payment a n d performance
are synonymous.
 ART. 1233. A debt
shall not be understood
to have been paid
unless the thing or
service in which the
obligation consists has
been completely
delivered or rendered,
as the case may be.
(Art. 1233, N C C )
When debt is considered
paidA debt ma y refer to a n obligation to
deliver money, to deliver a thing (other than
money), to d o a n act, or not to d o a n act.
A debt to deliver a thing (including money)
or to render service is not understood to have
been paid unless the thing or service has been
completely delivered or rendered, as the case
m a y be. Partial or irregular performance will not
produce the extinguishment of a n obligation as
a general rule.
Example
s:
1. S obliged himself to deliver 100 sacks of rice
to B. S delivered only 90 sacks.
Under the law, there is no p ayment by S,
a n d B c a n refuse to p a y for the 90 sacks if S
does not deliver what is lacking.

2.D promised to p a y C P1,000. D is giving only

P900. C c a n refuse to a c c e p t P900 because the
fulfillment is not complete.
Example
s:
3. X agreed to paint the house of Y for
P20,000.X did not paint the kitchen
anymore a n d instead asked Y to p a y him
P20,000 less the cost of painting the
kitchen.
Y c a n refuse to p a y X because the
debt of Y (to deliver money) will arise only
after the debt of X (to paint the house) is
completely rendered.
 ART. 1234. If the
obligation has been
substantially performed
in good faith, the
obligor may recover as
though there had been
a strict and complete
fulfillment, less damages
suffered by the obligee.
(Art. 1234, N C C )
Recovery allowance in case of
substantial performance in good
faith Article 1234 is the first exception to
the rule laid down in Article 1233. The
reason for the exception given by the
C o d e Commission is as follows:
“The a b o v e rule (ART. 1234) is
adopted from American Law. Its fairness is
evident. In case of substantial performance,
the obligee is benefited. So the obligor
should b e allowed to recover as if there h a d
been a strict a n d complete fulfillment less
d a m a g e s suffered by the obligee.
This last condition affords a just
compensation for
the relative breach committed by the
Requisites for the application of
Article 1234

[Link] must b e
substantial
performance; a n d

[Link] obligor must b e in

g o o d faith.
Exampl
e: S obliged himself to deliver 500 b a g s of
cement to
B. However, despite diligent efforts on his part, S
was able to deliver only 400 b a g s because of
cement shortage. Take note that S wants to
comply with his obligation to deliver the entire
500 b a g s but he could not d o so for reasons
beyond his control.
Under Article 1234, S c a n recover as though
there h a d been complete delivery less the price
of the 100 bags. S must show, however, that he
attempted in g o o d faith to c o m
 ART. 1235. When
the obligee accepts
the performance,
knowing its
incompleteness or
irregularity, and
without expressing
any protest or
objection, the
Recovery allowed when incomplete or
irregular performance is waived
The a b o v e provision is the
other exception to Article 1233.
It is founded on the principle
of estoppel. If the payment is
incomplete or irregular, the
creditor m a y properly reject it.
In ca se of acceptance,
the law considers that he
waives his right. The whole
obligation is extinguished.
Requisites for the application of
Article 1235
[Link] obligee knows that
the performance is
incomplete or irregular;
and

[Link] accepts the

performance without
expressing any
Exampl
e: X agreed to paint the house of
Y. According to their stipulation, X
would use a particular brand of
paint.
If Y a c c ep t e d the p erformance
of X, knowing that the paint used
was another brand a n d without
expressing any protest or objection,
the o b ligation is d e e m ed fully
complied with.
Unlike in Article 1234, where
 ART. 1236. The creditor is not
bound to accept payment or
performance by a third person who
has no interest in the fulfillment of
the obligation, unless there is a
stipulation to the contrary.
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. 1236, N C C )
Person from whom the creditor
must a c c e p t payment
[Link] debtor
[Link] person who has a n
interest in the obligation
(like a guarantor).
3.A third person who has no
interest in the obligation
when there is stipulation
that he c a n make
Creditor m a y refuse payment
by a third person
“Under the old Civil Code, the creditor
cannot refuse payment by a third person
but the Commission believes that the
creditor should have a right to insist on the
liability of the debtor.
Moreover, the creditor should not b e
compelled to
a c c e p t payment from a third person whom he
m a y dislike or distrust. The creditor m a y not,
for personal reasons, desire to have any
business dealings with a third person; or the
creditor m a y not have confi dence in the
honesty of the third person who might deliver
a defective thing or p a y with a check which
Creditor m a y refuse payment
by a third person
“Or he might b e the
creditor’s bitter enemy. Or
suppose the contract is to sell a
horse, or a car of a certain
make, or a tractor. C a n a total
stranger compel the creditor to
a c c e p t the horse, or the car, or
the tractor that he (former) is
d e livering to him? How could
the creditor b e absolutely sure
that the thing delivered is in
a c c o rd a n c e with the
Effect of payment by third
person
The second paragraph of Article 1236 recognizes
that payment or performance m a y b e m a d e by any
person not incapacitated, even without the knowledge
or against the will of the debtor. A n d although he has
absolutely no interest in the obligation.

1. If made without the knowledge or against the will of

the debtor.- The payer c a n recover from the debtor only
insofar as the payment has been beneficial to the latter. In
other words, the recovery is only up to the extent or
amount of the debt at the time of payment.
Effect of payment by third
person
2. If made with the knowledge of
the debtor.- The payer shall
have the rights of
reimbursement a n d
subrogation, that is, to recover
what he has paid (not
necessarily the amount of
debt) a n d to acquire all the
rights of the creditor.
Example
s: D owes C the sum of P1,000. If S, a
stranger to the obligation, offers to
p a y C, the latter m a y or m a y not
a c c e p t the offer of payment. Suppose,
C accepts, the right of S to recover
from D depends upon whether the
payment is with or without the
knowledge or consent of D.
Example
s:
1. Without the knowledge or against the will of D. – If
the actual indebtedness is P1,000 a n d S paid
P1,000, he c a n ask reimbursement for P1,000 but
if P400 h a d already b e e n paid by D, then S is
entitled to b e reimbursed only for the amount of
P600 because it is only to that a m o u nt that D has
been benefited. S c a n recover P400 from C who
should not have a c c e p t e d it.
If C acted in b a d faith, he is liable also for
interest in lieu of damages.
Example
s: 2. With the knowledge of D.-
In either case, if the
payment of P1,000 was
m a d e with the knowledge
or consent of D, S c a n
recover from D P1,000 with
all the rights of subrogation
to the accessory
obliagations such as
mortgage, guaranty, or
penalty.
 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 his rights, such as
those arising from a
mortgage, guaranty, or
penalty. (Art. 1237, N C C )
Right of a third person to
subrogation
Whoever pays on behalf of the debtor is
entitled to subrogation if the payment is with
consent of the latter. If the payment is without
the knowledge or against the will of the
debtor, the third person cannot compel the
creditor to subrogate him in the latter’s
accessory rights of mortgage, guaranty, or
penalty.
M a y there b e subrogation, if the
creditor willingly permits the payor to b e
subrogated in his rights? Since the provision
of Article 1237 is for the benefit of the debtor,
the subrogation c a n only take place with his
consent. The third person who without
Subrogation a n d
reimbursement distinguished.

1. In reimbursement, the third person entitled

by reason of payment has merely the bare
right to b e refunded to the extent provided
in the second paragraph of Article 1236
without the right to the guarantees a n d
securities of the original obligation. In
subrogation, however, there is no real
extinction of the obligation, but only a
c h a n g e of creditor.
Subrogation a n d
reimbursement distinguished.

2. In reimbursement, the third

person entitled by reason of
payment has merely the bare
right to b e refunded to the
extent provided in the second
paragraph of Article 1236 without
the right to the guarantees a n d
securities of the original
obligation. In subrogation,
ExamplD borrowed from C P1,000. G is the
e: Without the knowledge or consent of D, S,
guarantor.
paid C P1,000.
In this case, S c a n claim reimbursement
from
D for the whole amount of P1,000 inasmuch as
D was benefited up to that amount.
If D cannot p a y S, the latter cannot
proc e e d
against G, the guarantor (even if C is willing)
because,
having paid without the consent of D, S is not
entitled
to subrogation. But if the payme nt was with the
expense or tacit approval D, S would b e
entitled not merely to full reimbursement but
also to subrogation.
Suppose the o b ligation of D is secured
 ART. 1238. Payment
made by a third person
who does not intend
to be reimbursed by
the debtor is deemed
to be a donation, which
requires the debtor’s
consent. But the
payment is in any case
valid as to the
Payment by a third person who
does not intend to be
reimbursed
Article 1238 “embodies the idea
that no one should b e compelled to
a c c e p t the generosity of another.” If
the p aying third person does not
intend to b e reimbursed, the p ayment
is d e e m e d a donation which
requires the debtor’s consent to b e
valid.
However, if the creditor accepts
the payment, it shall b e valid as to
him a n d the payor although the
debtor did not give his consent to the
Exampl
e: intention
D owes C P1,000. Without the
of being reimbursed, S paid D’s
obligation. D h a d previously a c c e p t e d S’s
generosity.
In this case, D is not liable to S a n d his
obligation is extinguished. But if D did not
consent to the donation, S m a y recover from
D since there has been no donation,
although originally S did not intend to b e
reimbursed. Nevertheless, the obligation of D
to C is extinguished because the payment is
valid as to C who a c c e p t e d it.
C a n D legally refuse to p a y S a n d
instead insist on paying C ? No.
 ART. 1239. In obligations to
give, payment made by one
who does not have the free
disposal of the thing due and
capacity to alienate it shall
not be valid, without prejudice
to the provisions of Article
1427 under the Title on “Natural
Obligations”. (Art. 1239, N C C )
Meaning of “free disposal of thing
due” and “capacity to alienate.”
[Link] disposal of the thing due
means that the thing to b e
delivered must not b e subject to
any claim or lien or
encumbrance (e.g. mortgage,
pledge) of a third person.

[Link] to alienate means that

the person is not incapacitated
to enter into contracts a n d for
Free disposal of thing due a n d
capacity to alienate required
As a general rule, in
obligations to give, payment by
one who does not have the free
disposition of the thing due a n d
capacity to alienate it is not valid.
*This means that the thing paid
c a n b e recovered.
The exception is provided in
Article 1427. The creditor cannot
b e compelled to a c c e p t
payment where the person
paying has no capacity to make
Example
s:
1. S agreed to sell to B a television set. If the television set
delivered to B by S belongs to C, the same c a n b e
recovered by C because the payme nt is not valid. S does
not have free disposal of the television set.
The same right of recovery exists although the television
set belongs to S if he is a minor and, therefore, has no capacity
to alienate it.

[Link] Article 1427, If S is a minor between 18 a n d 21 years,

a n d he voluntarily pays a sum of money or delivers a fungible
thing (like rice) to B in fulfillment of his obligation, there shall b e
no right to recover the same from B in case the latter has
spent or consumed it in g o o d faith.
 ART. 1240. Payment
shall be made to the
person in whose favor the
obligation has been
constituted, or his successor
in interest, or any person
authorized to receive it. (Art
1240, N C C )
Person to whom payment shall
b e made.
[Link] creditor or obligee (person in
whose favor obligation has been
constituted);

[Link] successor in interest (like a n

heir or assignee);

[Link] person authorized to receive it.

Exampl
e: D owes C P1,000. In this
case, D must p a y C or any
person authorized by C or in case
of his death, his heirs or any
person authorized by law.
Payment to any other person is
not
valid except as provided in
Article 1241, paragraph 2.
That D acted in g o o d
faith in paying to the wrong
Mean in g of “any person
authorized to receive it”
As used in Article 1240, it means not
only a person authorized by the creditor,
but also a person authorized by law to
receive the payment, such as a guardian,
executor or law to receive the payment,
a n d such as a guardian, executor or
administrator of the estate of a deceased,
a n d assignee or liquidator of a
partnership or corporation as well as any
other person who m a y b e authorized to d o
so by law.
Under Article 1242, payment in g o o d
faith to any person in possession of the
 ART. 1241. Payment to a person who is
incapacitated to administer his property shall be
valid if he has kept the thing delivered, or insofar
as the payment has been beneficial to him.

Payment made to a third person shall also

be valid insofar as it has redounded to the benefit
of the creditor. Such benefit to the creditor need
not be proved in the following cases:

1. If after the payment, the third person acquires

the
creditor’s rights;

2. If the creditor ratifies the payment to the third

person;

3. If by the creditor’s conduct, the debtor has

been led to believe that the third person had
authority to receive the payment. (Art. 1241,
NCC)
Effect of payment to a n
incapacitated person.
Payment to a person incapacitated to
administer or m a n a g e his property is not valid
unless such incapacitated person kept the
thing paid or delivered (so that it is not
necessary that it should have been invested
in some profitable venture), or it was
benefited by the payment.
In the absence of this benefit, the
debtor m a y b e m a d e to p a y again by
the creditor’s guardian or by the
incapacitated person himself
when he acquires or recovers his capacity.
Proof of
such benefits is incumbent upon the
Exampl
e: D delivers P1,000 to C, a minor
under guardianship, in payment of
a debt. C loses P700 of the money
in gambling, or due to negligence
or ignorance.
In this case, the payment m a d e
should b e considered as m a d e only
to the extent of P300.
O n the other hand, if C kept the
money paid or spent it for purpose
useful to him, the payment shall b e
valid; otherwise, C would unduly
Effect of payment to a third
person
Payment to a third person or wro n g party is
not valid except insofar as it has redounded to
the benefit of the creditor.
That the creditor was benefited by the
payment m a d e by the debtor to a third person
is not presumed a n d must, therefore, b e
satisfactorily established by the person interested
in proving this fact. In the absence of such proof,
the payment thereof in error a n d in g o o d faith
will not deprive the creditor of his right to d e m a n d
payment.
When benefit to creditor n eed
not b e proved by debtor
But the d e btor is relieved from
proving benefit to the creditor in
case of:
1. Subrogation of the payer in the
creditor’s rights;
2. Ratification by the creditor;
3. Estoppel on the part of the creditor.
In such cases, the benefit to the
creditor is to b e presumed. Through
estoppel, a n admission or
Exampl
e: D is indebted to C in the amount
of P1,000. O n the date of the maturity
of the obligation, payment was m a d e
by D to T, a third person.
In this case, D is still liable to C. If T
delivered P700 to C, the payment by D
is valid only to the extent of P700. But D
must prove the delivery to C. Such
proof, however, is not n e c e ssary if, after
the p ayment, T acquired C’s right
against D, or C ratified the payment to
T, or if before payment, D has been led
 ART. 1242.
Payment made in
good faith to any
person in
possession of the
credit shall release
the debtor. (Art.
1242, N C C )
Payment to third person in
possession of credit
This article gives another instance
when there is a valid payment to a third
person.
It must b e observed that the
“possession” referred to under the a b o v e
provision is possession of the credit itself
a n d not merely of the document or
instrument evidencing the credit. Hence,
mere possession of the instrument (unless
transferable by delivery) does not entitle
the holder to payment nor does payment
release the debtor. Furthermore, the payer
must act in g o o d faith, that is, in the
honest belief that he is making a valid
payment a n d that the p a y e e is the owner
Exampl
e: D is indebted to C in the amount of P1,000 which
indebtedness is evidenced by a promissory note signed by
D in favor of C. C lost the promissory note which was later
found by T who d e m a n d e d payme nt from D.
Payment to T is not valid because T is the processor
merely of the document evidencing the credit a n d not of the
credit itself.
If the promissory note is payable to bearer or
holder, the obligation will b e extinguished if D pays T in
g o o d faith.
Similarly, if the promissory note was indorsed by C to T,
under a private agreement that T would not collect from D,
payment by D in g o o d faith to T will also extinguish the debt.
The right of C will b e against T.
 ART. 1243.
Payment made to
the creditor by the
debtor after the
latter has been
judicially ordered to
retain the debt shall
not be valid. (Art.
1243, N C C )
When payment to creditor not
valid. In a n action against the debtor
who is the creditor of another, the
latter (the debtor-stranger), during the
pendency of the case, m a y b e
ordered by the court (or by any
competent authority though it b e
administrative) to retain the debt until
the right of the plaintiff, the creditor in
the main litigation is resolved.
Payment m a d e subsequently by
the debtor-stranger shall not b e
valid if the plaintiff wins the case
Exampl
e:
D owes C P1,000. E, in turn owes D P1,000. In a n action by C
against D, E, upon petition of C, ma y b e ordered by the court
hot to
p a y D a n d to retain the debt in the meantime. In this case,
the debt of E
is said to b e “garnished” or is subjected to payment to C.
Any payment m a d e by E to D in violation of the
judicial order is
considered invalid under this article. In other words, C ma y
still hold E
liable for the debt. Of course, should E b e m a d e to p a y C, a
quasi-
contractual obligation on the part of D is created, which is to
return the
amount he h a d received from E. The payment by E to C shall
extinguish the obligation of D to C.
But the payment by E to D shall b e valid if m a d e after
the order
 ART. 1244. The debtor of a
thing cannot compel the creditor
to receive a different one,
although the latter may be of the
same value as, or more valuable
than that which is due.
In obligations to do or not to
do, an act or forbearance cannot
be substituted by another act or
forbearance against the obligee’s
will. (Art. 1244, N C C )
Every prestation due must b e
complied with
[Link] first paragraph refers to a real
obligation to deliver a specific thing. A
thing different from that due cannot b e
offered or d e m a n d e d against the will
of the creditor or debtor, as the case
m a y be.

[Link] second paragraph refers to

personal (positive a n d negative)
obligations. The act to b e performed
or the act prohibited cannot b e
Exampl
e:
D obliged himself to
deliver to C a specific horse.
D cannot require C to
a c c e p t another horse
although it c o m m a n d s a
higher price; neither c a n C
require D to deliver another
horse belonging to D
although it c a n b e sold
only at a much lower price.
When prestation m a y b e
substituted.

Of course, substitution c a n
b e m a d e if the obligee
consents. In facultative
obligations, the debtor is given
the right to render another
prestation in substitution.
Article 1244 will not also
apply in ca se of waiver by the
creditor or substitution is
 ART. 1245. Dation in
payment whereby
property is alienated
to the creditor in
satisfaction of a debt
in money, shall be
governed by the law
of sales. (Art. 1245,
NCC)
Special forms of
payment
[Link] in payment
[Link] of payments
[Link] by cession
[Link] of payment a n d consignation

Strictly speaking, application of

payments is not a special form of
Meaning of dation in
payment
Dation in payment (adjudication or
dacion en pago) is the c onv ey a nc e of
ownership of a thing as a n a c c e p t e d
equivalent of performance.
It is a special form of payment
becaus e it is not the ordinary way of
extinguishing a n obligation. A n existing
debt in money is satisfied, not by payment
of money but by the alienation of property.
Exampl
e: D owes C P15,000. To fulfill the obligation, D
with the consent of C, delivers a piano.
If the piano, however, is worth less than
P15,000, the c o n v ey a n c e must b e d e e m e d to
extinguish the obligation to the extent only of the
value agreed upon unless the parties by their
agreement have considered the piano as full
payment, in which case, the obligation is totally
extinguished.
The c o n v ey a n c e is, in effect, a novation
of the contract.
Governing
law
The law of sales
governs because dation
in payment ma y b e
considered a specie of
sale in which the
amount of the money
debt becomes the price
of the thing alienated.
 ART. 1246. When the obligation
consists in the delivery of an
indeterminate or generic thing,
whose quality and circumstances
have not been stated, the creditor
cannot demand a thing of superior
quality. Neither can the debtor
deliver a thing of inferior quality.
The purpose of the obligation and
other circumstances shall be
taken into consideration. (Art.
1246, N C C )
Rule of medium
quality
If the obligation consists in the delivery of a specific thing,
the very thing due must b e delivered. However, if the obligation is to
deliver a generic thing, the purpose of the obligation a n d other
circumstances shall b e taken into consideration to determine the
quality or kind of thing to b e delivered.

Article 1246 is a principle of equity in that it supplies justice in

cases where there is lack of precise declaration in the obligation. It is
always hard to find one thing that is exactly similar to another. If there
is disagreement between the parties, the law steps in a n d determines
whether the contract has been complied with or not according to the
circumstances.

The benefit of this article m a y b e waived by the creditor or by

accepting a thing of inferior quality, a n d by the debtor by delivering
a thing of superior quality.
Example
s: S promised to deliver to B a horse. B
cannot compel S to deliver a price-winning race
horse. Neither c a n S require B to a c c e p t a n old
sickly horse.

1. If B owns a stable of race horse a n d horse-

racing is his main diversion in life, which fact is
known to S, a n d the price agreed upon is the
reasonable price of a race horse, then S must
deliver a race horse.
Example
s:
[Link] B happens to b e a calesa driver a n d B
agreed to p a y S for the horse a n amount which
us the reasonable price of a horse for calesa,
then that kind of horse ma y b e delivered.

[Link] B is a veterinary doctor a n d his only

purpose in buying a horse is to e xamine its
organs in connection with his work, this a n d
other relevant circumstances show that the
old sickly horse was intended by the parties to
b e delivered.
 ART. 1247. Unless it is
otherwise stipulated, the
extrajudicial expenses
required by the payment
shall be for the account
of the debtor. With
regard to judicial costs,
the Rules of Court shall
govern. (Art. 1247, N C C )
Debtor pays for extrajudicial
expenses
The extrajudicial expenses of payment are
for the account of the debtor. The reason is that
the obligation is extinguished when p ayment is
m a d e a n d it is, therefore, the debtor who is
primarily benefited.
If the parties have m a d e a stipulation as to
who will bear the expenses, then their stipulation
shall b e followed.
Article 1247 does not apply to expenses
incurred by the creditor in going to the debtor’s
domicile to collect.
Losing party generally pays
judicial costs
Judicial costs are the statutory amounts
allowed to a party to a n action for his expenses
incurred in the action. Under the Rules of Court,
the costs of a n action shall, as a rule b e paid by
the losing party. The court may, however, for
special reasons, adjudge that either party shall
p a y the costs or that the same b e divided as
m a y b e equitable.
N o costs are allowed against the
Government, unless otherwise provided by law.
 ART. 1248. Unless there is an
express stipulation to that effect,
the creditor cannot be compelled
partially to receive the prestations
in which the obligation consists.
Neither may the debtor be required
to make partial payments.
However, when the debt is
in part liquidated and in part
unliquidated, the creditor may
demand and the debtor may
effect the payment of the former
without waiting for the liquidation
of the latter. (Art. 1248, N C C )
Performance of obligation
should b e complete
The a b o v e provision contemplates
obligations where there is only one creditor a n d
only one d e btor. Joint a n d solidary obligations
are governed by Articles 1207 t0 1222.
In order that the payment m a y extinguish
a n obligation, it is necessary that there, b e
complete performance of the prestation. The
creditor ma y a c c ep t but he cannot b e
compelled to a c c ep t partial performance. The
debtor has the duty to comply with the whole of
the obligation but he cannot b e required to
make partial payments if he does not wish to d o
When partial performance
allowed There are cases, however, when partial performance m a y
b e either required or insisted. A m o n g theses cases are:
1. When there is a n express stipulation to that effect

2. When the debt is in part liquidated (definitely a n d

determined or computed) a n d in part liquidated

3. When the different prestations in which the obligation consists are

subject to different terms or conditions which affect some of them.
In obligations which comprehend several distinct prestations (e.g.,
obligation to p a y debt in installments), it is evident that the
prestations n e e d not b e executed simultaneously but e a c h
successive execution thereof must b e complete.
Example
s:
1. D is indebted to C for P5,000 due today. D cannot
compel C to receive P4,000 in partial payment of the
obligation a n d neither c a n C require D to p a y only
P4,000 unless there is an agreement to the contrary.
2. D owes C P5,000 plus the share of C from the profit of
a business which, however, has not yet been
liquidated or determined, C m a y d e m a n d a n d D
m a y effect the payment of the P5,000, which is
already known.
3. If P4,000 of the debt of D is due today a n d P1,000
tomorrow, the obligation c a n b e complied with
partially. Similarly, partial performance m a y b e
eff ected in case the payment of the P1,000 is subject
to the fulfillment of a condition.
 ART. 1249. The payment of debts in
money shall be made in the currency
stipulated, and if it is not possible to
deliver such currency, then in the
currency which is legal tender in the
Philippines.
The delivery of promissory notes
payable to order, or bills of exchange or
other mercantile documents shall
produce the effect of payment only when
they have been cashed, or when through
the fault of the creditor they have been
impaired.
In the meantime, the action derived
from the original obligation shall be held
in abeyance. (Art. 1249, N C C )
Meaning of legal
tender
Legal tender is that
currency which a debtor
c a n legally compel a
creditor to a c c e p t in
payment of a debt in
money when tendered
by the debtor in the right
amount.
Legal tender in the
Debts in money shall b e paid in the
Philippines
currency stipulated. If it is not possible to deliver
such currency or in the absence of any
stipulation to make payment in a foreign
currency, then the payment shall b e m a d e in
the currency which is legal tender in the
Philippines.
In the Philippines, all coins a n d notes
issued by the Bangko Sentral n g Pilipinas (BSP)
constitute legal tender for all debts, both public
a n d private.
Unless otherwise fixed by the Monetary
Board of BSP, coins are legal tender for amounts
not exceeding P50 for denominations of P0.25
a n d above, a n d in those of amounts not
exceeding P20 for denominations of P0.10
Payment by means of
instruments of credits.
1. Right of creditor to refuse or accept. –
Promissory notes, checks, bills of exchange
a n d other commercial documents are not
legal tenders and, therefore, the creditor
cannot b e compelled to a c c e p t them. This
is true e ven though the
check is certified, or is a m a n a g er’s check.
But the creditor, if he c hooses, ma y a c c e p t
them, without the a c c e p t a n c e producing
the effect of payment.
In the meantime, the
demandability of the original obligation is
suspended. The creditor must cash the
instruments, a n d it is only when it is
dishonored that he c a n bring a n action for
non- payment of the debt.
Payment by means of
instruments of credits.
[Link] on obligation.- Payment
by means of mercantile
documents does not
extinguish the obligation:

[Link] they have

been cashed;
[Link] they have
been impaired through the
fault of the creditor.
Exampl
e: D owes C P5,000 which is due today. C c a n
refuse to a c c ep t check from D.
If C accepts, there is no payment yet until
the check has been cashed or when through his
fault, it has been impaired as when he has
delayed in presenting the check for payment for
a n unreasonable length of time a n d the check
has lost its value by reason of the insolvency of
the bank.
Until the check is dishonored, C cannot
d e m a n d the payment of the obligation.
 ART. 1250. In case an
extraordinary inflation or
deflation of the
currency stipulated
should supervene, the
value of the currency at
the time of the
establishment of the
obligation shall be the
basis of payment, unless
there is an agreement to
Meaning of inflation a n d
deflation
1. Inflation is a sharp sudden increase of money or
credit or both without corresponding increase
in business transactions. Inflation causes a drop
in the value of money, resulting in the rise of the
general price level.

2. Deflation is the reduction in volume a n d

circulation of the available money or credit,
resulting in a decline of the general price level;
it is the opposite of inflation.
Basis of payment in case
extraordinary inflation or deflation
Under the Article 1250, the
purchasing value of the currency
at the time of the establishment of
the obligation shall b e the basis of
payment, in case of any
extraordinary increase or
decrease in the purchasing power
of the currency which the parties
could not have reasonably
foreseen. This is, how the parties,
subject to the agreement of the
parties to the contrary.
Exampl
e: D borrowed from C P5,000 payable after 5
years.
O n the maturity of the obligation, the value of
P5,000 dropped to P2,500 because of inflation
(or increase to P10,000 because of deflation).
In this case, the basis of payment shall b e
the equivalent value of the currency today to that
five years ago. Hence, D is liable to p a y P10,000
(or P2,500) unless there is a n agreement to the
contrary, e.g., that D shall p a y C P5,000
regardless of any extraordinary decrease or
increase in the purchasing power of the peso.
 From the employment of
the words “extraordinary
inflation or deflation of the
currency stipulated,” it c a n b e
seen that the legal rule in Article
1250 envisages contractual
obligations where a currency is
selected by the parties as the
medium of payment. It does not
apply where the obligation to
p a y arises from a source
independent of contract
 ART. 1251. Payment shall be made
in the place designated in the
obligation.
There being no express stipulation
and if the undertaking is to deliver a
determinate thing, the payment shall be
made wherever the thing might be at the
moment the obligation was constituted.
In any other case the place of
payment shall be the domicile of the
debtor.
If the debtor changes his domicile
in bad faith or after he has incurred in
delay, the additional expenses shall be
borne by him.
These provisions are without
Place where obligations shall b e
paid.
Article 1251 gives the rules
regarding the place for the payment
of a n obligation without prejudice to
venue under the Rules of Court.

1. If there is a stipulation, the payment

shall b e m a d e in the place
designated.
2. If there is a stipulation, the payment
shall b e m a d e in the place where
the thing was, at the perfection of
Place where obligations shall b e
paid.
3. If there is no stipulation a n d the thing to b e delivered
is generic, the place of payment shall b e the domicile
of the debtor. In this case, the creditor bears the
expenses in going to the debtor’s place to a c c e p t
payment subject to the rule in paragraph five.

The order as a b o v e enumerated is

successive and exclusive as m ay b e gleaned from
the provision itself.

Note: Venue is the place where a c ourt suit or

a ction must b e filed or instituted.
Place where obligations shall b e
paid.
Domicile is the place of a person’s habitual
residence; in the place where he has his true fixed
permanent h om e a n d to which place he, whenever he is
absent, has the intention of returning. Residence is only a n
element of domicile. It simply requires bodily presence
as a n inhabitant in a given place, while domicile (or legal
residence) requires bodily presence in that place a n d
also a n intention to m ake it one’s domicile.

It is b e lieved that the term “dom icile”, as used in Article

1251, connotes “actual” as distinguished from “legal”
residence.
Exampl
e:
1. S obliged himself to deliver to B a specific refrigerator. It
was agreed that the refrigerator shall b e delivered at
B’s house. The house of B shall b e the place of the
delivery.

2. If there is no agreement as to the place of the delivery

a n d the refrigerator was in the house of C when the
parties entered into contract, then the delivery shall b e
m a d e at the house of
C. But if the refrigerator was temporarily at some place
(e.g.,
on a ship in transit), the place of delivery shall b e the
domicile of S unless otherwise stipulated.
Exampl
e:
3. If the obligation of S to p a y
a sum of
money (a generic thing), the place of
payment is that designated in the
obligation; otherwise, B must have to g o to
the house of S to receive payment. B incurs
the expenses incidental to such collection.
If S changes, his domicile in b a d faith or
after he has incurred in delay, the additional
expenses shall b e borne by him.
Subsection 1.- Application
of Payments
ART. 1252. He who has various
debts of the same kind in favor of one
and the same creditor, may declare at
the time of making the payment, to which
of them the same must be applied.
Unless the parties so stipulate, or when
the application of payment is made by
the party for whose benefit the term has
been constituted, application shall not be
made as to debts which are not yet due.
If the debtor accepts from the
creditor a receipt in which an application
of payment is made, the former cannot
complain of the same, unless there is a
Mean in g of application of
payments

Application of payments
is the designation of the
debt to which should b e
applied the payment
m a d e by a debtor who
has various debts of the
same kind in favor of one
a n d the same creditor.
Requisites of application of
payments
1. There must b e one debtor a n d one
creditor;
2. There must b e 2 or more debts;
3. The debts must b e of the same kind;
4. The debts to which payment m a d e
by the debtor has been applied must
b e due; a n d
5. The payment m a d e must not b e
sufficient to cover all the debts.
Application as to debts not yet
due The application of payments as to debts
not yet due cannot b e m a d e unless:

1. There is a stipulation that the debtor m a y so

apply; or

2. It is m a d e by the debtor or creditor as the

case m a y be, for whose benefit the period
has been constituted.
Rules on application of
payments
1. The debtor has the first choice; he
must indicate at the time of
making payment, a n d not
afterwards, which particular debt
is b e ing p aid. If, in making use of
his right, the debtor applied the
payment to a debt, he cannot
later claim that it should be
applied to another debt. The right
to make the application o n c e
exercised is irrevocable unless the
creditor consents to the change.
Rules on application of
payments
2. If the debtor does not
apply payment, the
creditor m a y make the
designation by specifying
in the receipt which debt
is being paid;
Rules on application of
payments
3. If the creditor has not
also m a d e the a pplication,
or if the application is not
valid, the debt, which is
most onerous to the debtor
a m o n g those due, shall b e
d e e m e d to have been
satisfied.
Rules on application of
payments
4. If the debts due are of
the same nature a n d
burden, the payment
shall b e applied to all of
them proportionately.
Example
s: D owes C as follows:
a. P1,500 payable on September 5;

b. P1,000 payable on September 20;

c.A specific transistor radio worth P2,000 to b e

delivered on September 20; a n d
d. P1,500 payable on October 15.

1. O n September 20, D paid C P1,500. D ma y apply the P1,500

to debt (a), or to debt (b) a n d (if C does not object) to a
portion of debt (a).
Example
s: If D paid only P1,000, he cannot choose to apply his
payment to the P1,500 debt because C cannot b e
compelled to receive partial payment. D cannot properly
apply his payment to debt (c) because it is not of the
same kind. He must deliver the very thing agreed upon.
Neither c a n he apply it to debt (d) which is not yet due
unless there is a stipulation to the contrary or he has the
benefit of the period.
A n application of payment m a d e by the debtor
without objection from the creditor is binding upon the
latter. His acquiescence is equivalent to a n agreem ent
a n d has the force a n d effi cacy of a contract.
Example
s:
2. If D does not make a choice, C c a n make the
designation in the receipt with the consent of D. D m a y
c h a n g e the application m a d e by C. Note that the law
says “If the debtor accepts”, which implies that he has the
liberty to reject also.
The a c c e p t a n c e by D of the receipt given by C is
regarded by the law as a contract in itself independent
of the principal obligation. His acquiescence to the
application m a d e by C amounts to a n assent to such
application which he m a y no longer revoke or c h a n g e
“unless there is a cause for invalidating
the contract” as where the consent of D in
accepting the receipt
was vitiated by reason of fraud, mistake, undue
Example
s:
3. If C does not make the application in
the receipt or no receipt was issued
by him, then the legal rules in Article
1254 will govern
 ART. 1253. If the
debt produces
interest, payment of
the principal shall not
be deemed to have
been made until the
interests have been
covered. (Art. 1253,
NCC)
Interest earned paid a h e a d of
principal.
The rule laid down in the article is
mandatory. Hence, the debtor cannot
choose to credit his payment to the
principal before the interest is paid. The
payment must b e applied first to the
interest a n d whatever balance is left c a n
b e credited to the principal. The creditor
c a n refuse a n application of the debtor
m a d e contrary to the provision of Article
1253.

The rule is subject, however, to any

agreement between the parties, or to
Exampl
e:
D owes C P1,000 with
P100 as accrued interest. D
pays C P1,000.
The P1,000 will first b e
applied to the interest earned
by the debt. Then the balance
of P900 will b e credited to the
amount. Therefore, D will still
o w e C P100 of the principal.
 ART. 1254. When payment
cannot be applied in accordance
with the preceding rules, or if
application cannot be inferred from
other circumstances, the debt
which is most onerous to the debtor,
among those due, shall be
deemed to have been satisfied.
If the debts due are of the
same nature and burden, the
payment shall be applied to all of
them proportionately. (Art. 1254,
NCC)
Legal application of
payments.
In case no application of payment
has been m a d e by the debtor a n d
the creditor, then the payment shall
b e applied to the most onerous debt,
a n d if the debts are of the same
nature a n d burden, to all of them
proportionately.
When a debt more onerous
than another
A debt is more onerous than another when
it is more burdensome to the debtor. N o fixed rule
c a n b e laid do w n in d etermining which d e bt is
more onerous to the debtor since the condition of
being more burdensome is a matter d e p e n d e nt
upon the circumstances. The Supreme Court,
however, in various decisions has given some
rules which c a n b e followed to determine whether
one d e b t is more burdensome than another.
When a debt more onerous
than another
1. A n interest-bearing debt is more onerous than a non-
interest –
bearing debt even if the latter is a n older one;
2. A debt as a sole debtor is more onerous than as a
solidary debtor.
3. Debts secured by a mortgage or by pledge are more
onerous than unsecured debts.
4. Of two interest-bearing debts, the one with a higher
rate is more onerous.
5. A n obligation with a penalty clause is more
burdensome than one without penalty clause.
Where debts subject to different
burdens
Suppose the debts are
subject to different burdens
(like one debt secured by a
mortgage a n d the other with
a penalty clause) that it
cannot b e definitely
determined which debts is
more onerous to the debtor.
To what debt should
the payment b e applied?
To all of them
Subsection 2. – Payment by
Cession
ART. 1255. The debtor may cede or
assign his property to his creditors in
payment of his debts. This cession, unless
there is stipulation to the contrary, shall
only release the debtor from responsibility
for the net proceeds of the thing
assigned. The agreements which, on the
effect of the cession, are made between
the debtor and his creditors shall be
governed by special laws. (Art. 1255, N C C )
Meaning of payment by
cession
Payment by cession is another
special form of payment. It is
assignment or abandonment of all the
properties of the debtor for the benefit
of his creditors in order that the latter
m a y sell the same a n d apply the
proceeds thereof to the satisfaction of
their credits.
Requisites of payment by
cession
1. There must b e two or more creditors;

2. The debtor must b e (partially) insolvent;

and

3. The cession must b e a c c e p t e d

by the creditors.
Effect of payment by
cession.
Unless there is stipulation to the
contrary, the assignment does not
make the creditors the owners of the
property of the debtor a n d the debtor
is released from his obligation only up
to the net proceeds of the sale of the
property assigned. In other words, the
debtor is still liable if there is a balance.
Exampl
e: D is indebted to several creditors in the
total amount of P2million. His assets are not
sufficient to p a y all his debts.
With the consent of his creditors, D m a y
assign his property to them to b e sold, to satisfy
their credits. If the net proceeds of the sale
amount only to 1.5million, D is still liable for the
balance of P500,000 unless there is a stipulation
that the assignment shall b e in full satisfaction of
all his debts.
Dation in payment a n d
cession distinguished.
1. In dation, there is usually only
one creditor, while in cession,
there are several creditors;
2. Dation does not presuppose the
insolvency of the debtor, while
in cession, the d e btor is
insolvent at the time of
assignment;
3. Dation does not involve all the
property of the debtor, while in
cession extends to all the
Dation in payment a n d
cession distinguished.
[Link] dation, the creditor becomes the
owner of the thing given by the debtor,
while in cession, the creditors only acquire
the right to sell the thing a n d apply the
proceeds to their credits proportionately;
and

[Link] is really a n act of novation,

while cession is not a n act of
novation.
Subsection 3. – Tender of
Payment a n d
Consignation
ART. 1256. If the creditor to whom tender
of payment has been refused without just cause
to accept it, the debtor shall be released from
responsibility by the consignation of the thing or
sum due.
Consignation alone shall produce the
same effect in the following cases:

1. When the creditor is absent or unknown, or

does not appear at the place of payment.
2. When he is incapacitated to receive the
payment at the time it is due;
3. When, without just
cause, he refuses to give
a receipt;

[Link] two or more persons

claim the same right to
collect;

[Link] the title of the

obligation has been lost. (Art.
1256, N C C )
Mean in g of “tender of
payment” a n d “consignation”
1. Tender of payment is the act, on the part of the debtor,
of offering to the creditor the thing or amount due.
The debtor must show that he has in his possession
the thing or money to b e delivered at the time of the
offer.

2. Consignation is the act of d e positing the thing or

a mount due with the proper court when the
creditor does not desire or cannot receive it, after
complying with the formalities required by law.
Consignation is always judicial a n d it generally
requires a prior tender of payment which is by its
very nature extrajudicial.
Requisites of valid
consignation
In order that the debtor m a y b e released from his obligation
by the consignation of the thing or sum due, the following requisites
must b e observed:

1. Existence of a valid debt which is due;

2. Tender of payment by the debtor a n d refusal without justifiable

reason by the creditor to a c c e p t it;

3. Previous notice of consignation to persons interested in the

fulfillment of the obligation;

4. Consignation of the thing or sum due; a n d

5. Subsequent notice of consignation m a d e to the interested parties.

Example
s:
1. D owes C a sum of money. O n the due date of the
obligation, D
offers to p a y the obligation but C refuses to a c c e pt the
payment without any justifiable reason.
In this case, D’s obligation will not b e extinguished until
he has
m a d e a valid consignation.

2.D entered into contract with C. D is given the right to

cancel the contract upon payment of P1,000 to C.
In this case, D has no existing debt to C. The amount of
P1,000 is
not o w e d by D, being merely the consideration for the exercise
of his
right to cancel the contract. Hence, consignation of the P1,000
is not
When tender of payment not
required
In the five (5) cases mentioned in the second
paragraph of Article 1256, tender of payment is not
necessary before the debtor c a n consign the thing due
with the court.
It has been held that a creditor who, without legal
justification, informs his debtor that payment of a debt will
not b e a c c e p t e d thereby waives payment on the date
when the payment will b e due; a n d as a consequence
the debtor is, in such case, excused from making a formal
tender of the money on such date. A debtor does not
incur default by failing to make a fruitless tender after
notification from the creditor that the money will not b e
received.
Requirement for valid tender of
payment
1. Tender of payment must comply with the rules
on payment. The tender, even if valid, does
not by itself produce legal p ayment, unless it
is completed by consignation.

2. It must b e unconditional a n d for the whole

amount.

3. It must b e actually made. The

manifestation of a desire or intention to
p a y is enough.
 ART. 1257. In order that
the consignation of the
thing due may release the
obligor, it must first be
announced to the persons
interested in the fulfillment
of the obligation.
The consignation
shall be ineffectual if it is
not made strictly in
consonance with the
Prior notice to persons
interested required.
In the absence of prior notice to the
persons interested in the fulfillment of the
obligation (such as guarantors, mortgages,
solidary debtors, solidary creditors), the
consignation, as payment, shall b e void.
The purpose of the notice is to give the
creditor a c h a n c e to reflect on his previous
refusal to a c c ep t payment considering that the
expenses of consignation shall b e charged
against a n d that in case of loss of the thing
consigned, he shall bear the risk thereof.
Consignation must comply with
provisions on payment.
Consignation, to amount to a
valid payment, must also comply
with the provisions which regulate
payment.
O n e o f these rules is that
payment should b e m a d e in legal
tender. The general rule is that a n
offer of a bank check for the
amount due is not a g o o d tender
a n d this is true even though the
check is certified or is a manager’s
check, except where no o b jection is
 ART. 1258. Consignation shall
be made by depositing the
things due at the disposal of
judicial authority, before whom
the tender of payment shall be
proved, in a proper case, and
the announcement of the
consignation in other cases.
The consignation having
been made, the interested
parties shall also be notified
thereof. (Art. 1258, N C C )
Consignation must b e with
proper judicial authority.
Consignation, by depositing the
thing or sum due with the proper judicial
authority, is necessary to effect
payment.
As tender of payment must precede
consignation, the tender must b e proved
by the debtor in the proper case. In other
cases when tender is not required, only
prior notice to interested persons of the
consignation needs to b e proved.
Notice to b e given to interested
parties of the consignation
m a dAfter
e the consignation has been made,
the interested parties must also b e notified
thereof. In a ca se this requirement was
held fulfilled by the service of summons
upon the defendants together wit a c o p y
of the complaint. (Limkako v. Limkako, 74
Phil. 313)
The purpose of the second notice is to
enable the creditor to withdraw the thing
or sum deposited in ca se he accepts the
 ART. 1259. The
expenses of
consignation, when
properly made, shall
be charged against
the creditor. (Art. 1259,
NCC)
Creditor bears expenses of
consignation
The consignation is m a de
necessary because of the
fault or unjust refusal of the
creditor to a c c e p t payment.
That being the case, it is but
just that the expenses b e
charged against him.
Of course, the expenses
are chargeable to the debtor
if the consignation is not
When consignation d e e m e d
properly m a d e
1. When the creditor accepts the
thing or sum deposited, without
objection, as payment of the
obligation;
2. When the creditor questions the
validity of the consignation, a n d the
court, after hearing, declares that it
has been properly made;
3. When the creditor neither accepts
nor questions the validity of the
consignation, a n d the court after
hearing, orders the cancellation of
 ART. 1260. Once the
consignation has been duly made,
the debtor may ask the judge to
order the cancellation of the
obligation.
Before the creditor has
accepted the consignation, or
before a judicial declaration that
the consignation has been properly
made, the debtor may withdraw the
thing or the sum deposited,
allowing the obligation to remain in
force. (Art. 1260, N C C )
Withdrawal by debtor of thing
or sum deposited
The observance of all the requisites of consignation
operates as a valid payment; hence, the debtor c a n move
for the cancellation of the obligation by the court. The
debtor, however, m a y withdraw as a matter of right the
thing or the sum deposited
(1) before the creditor has a c c e p t e d the consignation or
(2)
before a judicial declaration that the consignation has
been properly made, as he is still the owner of the same.
In such case, the obligation shall continue to remain in
force. All expenses are paid by the debtor.
If the withdrawal is with the consent of the creditor,
Article 1261 applies.
 ART. 1261. If, the
consignation having been
made, the creditor should
authorize the debtor to
withdraw the same, he shall
lose every preference
which he may have over
the thing. The co- debtors,
guarantors and sureties
shall be released. (Art.
1261, N C C )
Effect of withdrawal with
authority of creditor
Since consignation is for the benefit of the creditor,
he m a y authorize the debtor to withdraw the deposit
after he has a c c e p t e d the same or after the court has
issued a n order cancelling the obligation. As far as the
debtor a n d the creditor are concerned, their relations will
remain as they were before a c c e p t a n c e or cancellation.
However, the creditor shall lose every preference which
he m a y have over the thing, a n d the co- debtors
(referring to solidary debtors), guarantors, a n d sureties
shall b e released.
The solidary debtors are released only from their
solidary liability, but not from their shares of the
obligation, since unlike guarantors a n d sureties, they are
also principal debtors.
Example
s:
1. D in indebted to C in the sum of P50,000 with G as guarantor.
O n the due date after the obligation, D offered payment but
C refused to a c c e pt the same. So, D m a d e a consignation.
Subsequently, D withdrew the deposit after securing the
consent of C.
Under Article 1261, C shall lose whatever preference
he ma y have over the amount a n d G, the guarantor, shall
b e released.

[Link], in the example given, D a n d G are solidary liable to C, G is

released only from his solidary liability but he is still liable to C for
P25,000, his share in the obligation.
Lost of the Thing
Due
 ART. 1262. An obligation which
consists in the delivery of a
determinate thing shall be
extinguished if it should be lost or
destroyed without the fault of the
debtor, and before he has incurred
in the delay.
When by law or stipulation, the
obligor is liable even for fortuitous
events, loss of the thing does not
extinguish the obligation, and he
shall be responsible for damages.
The same rule applies when the
nature of the obligation requires the
assumption of risk. (Art. 1262, N C C )
When a thing is considered
lost It is understood that a thing is lost when it
perishes, or goes out of commerce or disappears
in such a way that its existence is unknown or it
cannot b e recovered.
Lost of a determinate thing under Article
1262 is the equivalent of impossibility of
performance in
obligations to d o referred to in Article 1266.
But “loss of the thing due” as used in Article 1231
a n d the a b o v e section subtitle, extends to both
obligations to give a n d obligations to do.
When loss of thing will
extinguish an obligation to
give
In order that a n obligation
m a y b e extinguished by the loss of
the thing, the following requisites
must b e present:

1. The obligation is to deliver a

specific or determinate thing;
2. The loss of the thing occurs without
the fault of the debtor; a n d
3. The debtor is not guilty o f delay.
When loss of thing will not
extinguish liability
There are cases, however, when the
loss of the specific thing even in the absence
of fault a n d delay will not exempt the debtor
from liability. There are:
1. When the law so provides;
2. When the stipulation so provides;
3. When the nature of the obligation
requires the assumption of risk;
4. When the obligation to deliver a specific
thing arises from a crime.
 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. (Art. 1263,
NCC)
Effect of loss of a generic
thing The a b o v e article is a n example
of a case where the debtor is liable
even for a fortuitous event because
the law says so.
It is based on the principle that
a generic thing never perishes
(genus nunquam perit). The debtor
c a n still be compelled to deliver a
thing of the same kind. The creditor,
however, cannot d e m a n d a thing
of superior quality a n d neither c a n
the debtor deliver a thing of inferior
Example
s:
1. S promised to deliver 100 cavans of rice to B. The 100
cavans of rice which S intended to deliver were lost in a
flood.
S is liable to B because his obligations is to
deliver a generic thing, a n d it c a n still b e paid from
other sources.

[Link] the obligation of S is to deliver 100 cavans of

rice from the harvest m a d e by him a n d such harvest is
completely lost or destroyed, is the obligation
extinguished?
ART. 1264. The courts
shall determine
whether, under the
circumstances, the
partial loss of the
object of the
obligation is so
important as to
extinguish the
Effect of partial loss of a specific
thing.
There is partial loss when only a portion
of the thing is lost or destroyed when it suffers
depreciation or deterioration. Partial loss is the
equivalent of difficulty of performance in
obligations to do.
In case of partial loss, the court is given
the discretion in case of disagreement
between the parties, to determine whether
under the circumstances it is so important in
relation to the whole as to extinguish the
obligation. In other words, the court will decide
whether the partial loss is such as to b e
equivalent to a complete or total loss.
Example:
S obliged himself to deliver to B a specific
race horse. The horse met a n accident as a result
of which it suffered a broken leg. The injury is
perma n e nt. Here, the partial loss is so important
as to extinguish the obligation.

If the loss is due to the fault of S, he shall

be obliged to p a y the value of the horse with
indemnity for damages.

If the horse to b e delivered is to b e

slaughtered by B, the injury is clearly not
important. Even if there was fault on the part of S,
he c a n still deliver the horse with liability for
d a m a ges, if any, suffered B.
 ART. 1265. Whenever
the thing is lost in the
possession of the debtor, it
shall be presumed that the
loss was due to his fault,
unless there is proof to the
contrary, and without
prejudice to the provisions
of Article 1165.
This presumption does not
apply in case of
Presumption of fault in case of loss of
thing in possession of debtor
The article establishes a disputable
presumption of fault whenever the thing to b e
delivered is lost in the possession of the
debtor. This presumption is reasonable
because the debtor who has the custody
a n d care of the thing c a n easily explain the
circumstances of the loss. The creditor has no
duty to show that the debtor was at fault.
Under the third paragraph of Article
1165, the obligor who is not at fault is still
liable in case he is guilty of delay or has
promised to deliver the same thing to two or
more persons who d o not have the same
interest.
When presumption not
applicable.
“In ca se of natural
calamities, the
presumption of fault
does not apply. Lack
of fault on part of the
debtor is more likely.
So it is unjust to
Example
1. D borrowed the car of C. O n the due
s: date of the obligation, D told C that the
car was stolen a n d that he was not at
fault. That is not enough to extinguish D’s
obligation. It is presumed that the loss
was due to his fault. Hence, he is liable
unless he proves the contrary.

2. Suppose the house of D was destroyed

because of fire. It is admitted that there
was a fire a n d it was accidental a n d that
the car was in the house at the time it
occurred. Here, D is not liable unless C
proves fault on the part of D.
 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.
(Art.
Effect of impossibility of
performance
This article refers to a case
when, without the debtor’s fault, the
obligation becomes legally or
physically impossible. The
impossibility of performance will result
in the extinction of the obligation.
This impossibility must take
place after the constitution of the
obligation. If the o b ligation is
impossible from the very beginning,
the obligation is void. In such case,
there is no obligation to be
extinguished.
Kinds of
impossibility
In purely personal obligations, when the
personal qualifications of the obligor are
involved, physical impossibility takes place when,
for example, the obligor dies or becomes
physically incapacitated to perform the
obligation.
Legal impossibility occurs when the
obligation cannot b e performed because it is
rendered impossible by provision of law,
although physically it ma y b e possible of
performance. Note that Article 1266 makes
express reference to obligations to d o or to
Example
s:
1. D obliged himself to paint apicture for C
to b e finished within a month. O n e week
after the obligation was constituted. D
met a n accident, as a result of which, his
arms were amputated.

Here the obligation of D has

b e c o m e physically impossible. D is,
therefore, released from his obligation.
Example
s:
2. D agreed to construct a commercial
building for C. The government refused to
issue a building permit because the area
has been declared by laws as a
residential zone.

The obligation of D is, therefore,

extinguished because it has b e c o m e
legally impossible. Here, the
performance of the prestation is
directly prohibited b y law.
Example
s:
3. D agreed to appear as counsel of C in a case.
Subsequently, D was appointed judge of the
Regional Trial Court. Under the law, judges on
Regional Trial Courts are prohibited from en g a g i n g
in the practice of law. D is, therefore, released from
his obligation. Here, the law makes the execution
impossible by imposing upon D duties of a
superior character which are incompatible with
the performance of the obligation contracted by
him.
 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. (Art. 1267,
Effect of difficulty of
performance
The general rule is that impossibility of
performance releases the obligor.
When the performance of the service has b e c o m e
so difficult as to b e manifestly beyond the contemplation
of both parties, the court is authorized to release the
obligor in whole or in part. It would b e doing violence to
the intention to the intention of the parties to hold the
obligor still responsible. There is a n element of the
unforeseen or fortuitous event in the situation covered by
Article 1276.
Article 1276 is applicable not only to (personal)
obligations to d o but also to (real) obligations to give or
deliver.
Exampl
e: D agreed to construct a road near a
mountain. A very strong typhoon caused
a n avalanche making the construction of
the road dangerous to human lives which
was not foreseen or contemplated by the
parties.
In this case, D m a y b e released, in
whole or in part, from his obligation to
continue with the construction.
 ART. 1268. When the debt
of a thing certain and
indeterminate 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 have
been offered by him to the
person who should receive it,
the latter refused without
justification to accept it. (Art.
1268, N C C )
Effect of fortuitous event where
obligation proceeds from a
criminal offense

Article 1268 is another instance where

a fortuitous event does not exempt the
debtor from liability.
The obligation subsists except when
the creditor refused to a c c e p t the
thing(e.g., property stolen from him)
without justification, after it h a d been
offered to him. Consignation is not
necessary. The debtor, however, must still
Exampl
e: D stole the jeep of C. Here, D has the
obligation to return the jeep to C. The
obligation of D arises from a n act
punishable by law.
Even if the jeep is destroyed without
the fault of D, he shall b e liable for the
payment of its price. The exception to the
rule is when C is in mora accipiendi. In
either case, D is liable if the loss is due to
his fault.
 ART. 1269. The
obligation having been
extinguished by the loss
of
the thing, the creditor
shall
have all the rights of
action
which the debtor may
have
against third persons by
reason of the loss. (Art.
Right of creditor to proceed
against third persons
Under the a b ove article, the creditor is given
the right to proceed against the third person
responsible for the loss. There is no n eed for a n
assignment by the debtor. The rights of action
of the debtor are transferred to the creditor from
the moment the obligation is extinguished, by
operation of law to protect the interest of the
latter by reason of the loss.
The rule in Article 1269 finds frequent
application in insurance.*
Exampl
e: S obliged to deliver to B a specific
horse.
The horse is lost through the fault of T.
The obligation of S is extinguished a n d
he is not liable to B. Such being the case, S
would not b e interested in going after T.
The law, however, protects B by giving him
the right to bring a n action against T to
recover the price of the horse with
damages.
Condonation
a n d Remission
of Debt
 ART. 1270. Condonation or
remission is essentially gratuitous,
and requires the acceptance by
the obligor. It may be made
expressly or impliedly.
One and the other kind shall
be subject to the rules which
govern inofficious donations.
Express condonation shall,
furthermore, comply with the
forms of donation. (Art. 1270,
NCC)
Mean in g of condonation or
remission.

Condonation or
remission is the
gratuitous
abandonment by the
creditor of his right
against the debtor.

It is thus a form
Requisites of condonation or
remission

1. It must b e gratuitous,
2. It must b e a c c e p t e d by the obligor,
3. The parties must have the capacity,
4. It must not b e inofficious; a n d
5. If m a d e expressly, it must comply
with the forms of donations.
Kinds of
remission
[Link] to its extent:

[Link].– when it covers

the entire obligation; or
[Link].– when it does not
cover the entire obligation.
Kinds of
remission
[Link] to its form:

[Link].- when it is m a d e
either verbally or in writing.
[Link].- when it c a n only
be inferred from conduct.
Kinds of
remission
[Link] to its date of effectivity:

[Link] vivos.- when it will take

effect during the lifetime of the
donor.
[Link] causa.- when it will
b e c o m e effective upon the death
of the donor. It must comply with the
Effect of inofficious
remission
While a person m a y make
donations, no one c a n give more than
that which he c a n give by will; otherwise,
the excess shall b e inofficious a n d shall b e
reduced by the court accordingly.
As a rule, testamentary disposition
which impair the legitime shall b e reduced
on petition of the heirs insofar as they are
inofficious or excessive.
Incidentally, legitime is that part of
the
testator’s property which he cannot
dispose of because the law has reserved
 ART. 1271. The delivery of
a private document
evidencing a credit, made
voluntarily by the creditor to
the debtor, implies the
renunciation of the action
which the former had against
the latter.
In order to nullify this
waiver it should be claimed to
be inofficious, the debtor and
his heirs may uphold it by
Presumption in case of voluntary delivery
of document of indebtedness by creditor
This article gives a n example of implied or tacit remission.
Note that it speaks of a private document. The legal
presumption of remission does not apply in the case of a public
document because it is easy to obtain a c o p y of the same ,
being a public record.
If the debt is not yet paid, the creditor would ne e d the
document to enforce payment. In case he voluntarily delivers
it to the debtor, the only logical inference is that he is
renouncing his right.
However, evidence is admissible to show otherwise, as when it
was
delivered only for examination.

If the obligation is joint, the presumption of remission

pertains only to share of the debtor who is in possession of
Payment, not remission of
debtUnder the second paragraph of
Article 1271, the renunciation of the
action which the creditor h a d against
the debtor m a y b e nullified by a
showing that the waiver is inofficious.
The debtor or his heirs m a y prove that
the delivery of the document was
really m a d e in virtue of payment of the
debt a n d not the remission.
 ART. 1272.
Whenever
the private document
in
which the debt
appears is
found in the
possession of
the debtor, it shall be
presumed that the
creditor
delivered it voluntarily,
Presumption in ca se document
found in possession of debtor
Ordinarily, the d o cument evidencing the
debt is in the possession of the creditor. He has in
his favor the legal presumption that his credit is as
yet uncollected, unless the debtor proves
satisfactorily, by one of the rules recognized in law,
that he has already paid the claim.
If the d o cument is later found in the hands of
the debtor a n d it is not known how he c a m e into
possession of the same, the presumption is that it
was voluntarily delivered by the creditor. This
presumption of voluntary delivery, in turn, gives rise
to the presumption of remission.

It is believed, however, that the presumption

of voluntary delivery should give rise to the
Exampl
e: D owes C P1,000 evidenced by a
promissory note. The note, signed by D, is
given to C.
If the promissory note is voluntarily
delivered to D, the presumption is that the
debt must have been paid by D.
If it is known that D h a s not yet paid C ,
it must b e presumed that the obligation has
been remitted by C.
Suppose it is not known how D c a m e
into possession of the promissory note. The
presumption is that it was voluntarily delivered
by C, unless C proves the contrary.
 ART. 1273. The
renunciation of the
principal debts shall
extinguish the
accessory obligations;
but the waiver of the
latter shall leave the
former in force. (Art.
1273, N C C )
Effect of renunciation of the principal
debt of the accessory obligation

The a b o v e provision
follows the rule that the
accessory follows the
principal. While the
accessory obligations
cannot exist without the
principal obligation, the
latter ma y exist without
Exampl
e: D owes C P1,000 with G as
guarantor. The principal debt here is
the P1,000, while the accessory
obligation is the g u aranty of G.
The remission of the debt of D by
C shall extinguish the g u aranty of G.
But if only the guaranty of G is
condoned, the obligation of D shall
remain in force.
 ART. 1274. It is
presumed that the
accessory obligation of
pledge has been remitted
when the thing pledged,
after its delivery to the
creditor, is found in the
possession of the debtor, or
of a third person who owns
the thing. (Art. 1274, N C C )
Presumption in case thing pledged
found in possession of debtor
In a contract of pledge,* it is necessary that the
thing pledged b e placed in the possession of the
creditor, or of a third person by c o m m o n agreement. A
third person who is not a party to the principal obligation
m a y secure the latter by pledging his own property.
Take note that if the thing pledged is later found
in the hands of the debtor or the third person only the
accessory obligation of pledge is presumed remitted,
not the obligation itself. The debtor shall continue to b e
indebted but he does not have to return the thing
pledged. The presumption yields to contrary evidence.
It does not arise of the third person in possession of the
thing pledged does not own the same.
Exampl
D delivers to C his diamond
e: ring in pledge to guarantee the
payment of a loan. If later on the
ring is found in the possession of D,
the presumption is that C has
agreed to the loan without the
pledge.
C ma y prove that he returned
the ring to D upon the latter’s
request to b e delivered b a c k to
him.
Confusion or
Merger of Rights
 ART. 1275. The
obligation is extinguished
from the time the
characters of the creditor
and debtor are merged in
the same person. (Art.
1275, N C C )
Meaning of confusion or
merger
Confusion or
merger is the
meeting in one
person of the qualities
of creditor a n d
debtor with respect
to the same
Reason or basis for
confusion
1. The law treats confusion or merger
as a m o d e of extinguishing
obligations because if a debtor is
his own creditor, enforcement of
the obligation becomes absurd
since a person cannot claim
payment from himself.

2. Furthermore, when there is a

confusion of rights, the purposes
for which the obligation m a y have
Requisites of confusion
[Link] must take place between
the principal debt a n d
creditor; a n d

[Link] must b e complete.

Example
s:
1. D owes C P1,000 fro which D executed
a negotiable promissory note* in favor of
C. C indorsed the note to E who, in turn,
indorsed it to
F. N o w F bought g o o d s from the store of D.
Instead of paying cash, F indorsed the
promissory note to D.
Here, D owes himself.
Consequently, his obligation is
extinguished by merger.
Example
s:
2. X a n d Y are the heirs of Z. In his will, Z
g a v e to X a parcel of land in usufruct
for ten years. The naked ownership to
the same parcel was given to Y. Later,
Y sold his interest in the land to X.
In this case, the usufruct is
naturally extinguished a n d X will
now have full ownership over the
land.
Example
s:
3. D borrowed money from C. As
security, D mortgaged his land.
Subsequently, D sold the land to C.
In this case, the mortgage is
extinguished, but the obligation
subsists. The extinguishment of the
accessory obligation does not carry
with it that of the principal 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. (Art.
Effect of merger in the person of
principal debtor or creditor
Merger in the person of
the principal debtor or
creditor extinguishes the
obligation.
Hence, the accessory
obligation of guaranty is
also extinguished in
a c c o rd a n c e with the
principal that the accessory
Exampl
e: D in indebted to C with G as guarantor.
The merger of the characters of debtor
a n d creditor in D shall free G from liability as
guarantor.
Similarly, merger which takes place in
the person of C benefits G because the
extinction of the principal o b ligation carries
with it that of the accessory obligation of
guaranty.
Effect of merger in the person of
guarantor
The extinguishment of the
accessory obligation does not
carry with it that of the principal
obligation. Consequently, merger,
which takes place in the person of
the guarantor, while it extinguishes
the guaranty, leaves the principal
obligation in force.
Exampl
e: Suppose, in the example above,
C assigns his credit to E who in turn,
assigns the credit to G, the guarantor.
In this case, the contract of
guaranty is extinguished. However, D’s
obligation to p a y the principal
obligation subsists. G now, as the new
creditor, c a n d e m a n d payment from
D.
 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. (Art. 1277, N C C )
Confusion in a joint
In a joint obligation, there are
obligation
as many debts as there are
debtors a n d as many credits as
there are creditors, the debts
and/or credits being considered
distinct a n d separate from one
another.
Each debtor has his own
creditor to whom he is liable a n d
confusion taking place in the person
of any debtor or creditor does not
affect the others. In other words,
the confusion will e xtinguish only the
Exampl
e: A, B a n d C are jointly liable to D in the
amount of P9,000 evidenced by a negotiable
promissory note. D indorsed the note to E, who in
turn, indorsed it to A.
In this case, A’s share in the obligation is
extinguished because of confusion in his person.
However, the indebtedness of B a n d C in the
amount of P3,000 e a c h remains, because as to
them there is no confusion. Consequently, B a n d
C would b e liable to A, the new creditor,P3,000
each.
Confusion in a solidary
obligation
Merger in the person of one of
the solidary debtors shall extinguish
the entire obligation because it is
also a merger in the other solidary
debtors.
Remember that in a solidary
obligation, there is only one
o bligation a n d every debtor is
individually responsible for the
payment of the whole obligation.
He who makes payment m a y claim
reimbursement from his co-debtors
Exampl
e: In the example given, if the obligation of A, B
a n d C is solidary, the indorsement to A
extinguishes the entire obligation of P9,000. A c a n
d e m a n d reimbursement from B a n d C.
Here, the basis of the right of A is not the
original obligation which has been extinguished
by the confusion which takes place in his person
but the confusion itself. It is as if A paid the entire
debt. He can, therefore, collect the proportionate
shares belonging to B a n d C on a n implied
contract of reimbursement.
Compensati
on
 ART. 1278.
Compensation shall
takes place when two
persons, in their own
right, are creditors
and debtors of each
other. (Art. 1278, N C C )
Meaning of
compensation
Compensation is the extinguishment to
the concurrent amount of the debts of
two persons who, in their own right, are
debtors a n d creditors of e a c h other.

It involves the simultaneous balancing

of two obligations in order to extinguish
them to the extent in which the amount of
one is covered b y that of the other.
Exampl
A owes B the amount of P1,000.
e:
B owes A the amount of P700.
Both debts are due a n d payable
today.
Here, compensation takes place partially,
that is, to concurrent amount of P700. So,
A shall b e liable to B for only P300.

If the two debts are of the sam e

amount, there is total compensation. The
two debts are extinguished without actual
transfer of money between the parties.
Compensation a n d
confusion distinguished
1. In confusion, there is only one person who is a
creditor a n d debtor of himself, while in
compensation, there are two persons involved,
e a c h of whom is a d e btor a n d a creditor of the
other;

2. In confusion, there is but one obligation,

while in compensation, there are two
obligations; a n d

3. In confusion, there is impossibility of payment,

while in compensation, there is indirect
payment.

There m a y b e compensation in joint a n d

Kinds of
1. By its effect or extent:
compensation
[Link].- when b oth obligations
are of the same amount a n d are
entirely extinguished.
[Link].- when the two
obligations are of different amounts
a n d a balance remains. The
extinctive effect of compensation
will b e partial only as regards the
larger debt.
Kinds of
compensation
[Link] its cause or origin:

[Link].- when it takes place by operation of

law even without the knowledge of the parties.

[Link].- when it takes place by

agreem ent of the parties.

[Link].- when it takes place by order from

a court in a litigation. Strictly speaking, judicial
compensation is merely a form of legal or voluntary
compensation when declared by the courts by
virtue of a n action by one of the parties, who
refuses to admit it, a n d by the defense of the other
who invokes it.

[Link].- when it c a n b e set up only by

one of the parties.
 ART. 1279. In order that compensation may be
proper, it is necessary:

[Link] each one of the obligors be bound

principally,
and that he be at the same time a principal creditor of
the other;

[Link] 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;

[Link] the two debts be due;

[Link] they be liquidated and demandable;

[Link] over neither of them there be any

retention or controversy, commenced by third persons
and communicated in due time to the debtor. (Art.
129, N C C )
Requisites of legal
compensation
1. The parties are principal creditors and principal
debtors of each other.

Examples:
a. A owes B
P1,000 B
owes A
P1,000
Compensation will take place because A a n d
B are principal debtors a n d creditors of e a c h other.
Requisites of legal
compensation
Example
s:

b. A owes B P1,000 with C as

guarantor. B owes C P1,000.

There will b e no compensation between B a n d

C because while B is principally liable to C, C is
merely subsidiarily liable to B. Hence, C c a n d e m a n d
payment from B.
Requisites of legal
compensation
Example
s:

c. A owes B P1,000.
B owes A P1,000, the latter as guardian or
administrator.

There will also b e no compensation. In this case, A

is personally liable to B, while B is not principally liable to A.
The real creditor of B is the ward under guardianship or
the estate under administration. A is creditor of B in a
representative capacity.
Requisites of legal
compensation
Examples:
d.A owes B, C, a n d D (partners in
partnership P) P1,000.
P owes A P1,000.
A cannot set up compensation
beca use B, C, a n d D are not principally
liable to A.

e.A (stockholder) owes B (corporation) for

amounts A collected as treasures of B.
Requisites of legal
compensation
Examples:

f. A owes B P1,000 in the latter’s

capacity as administrator of his father’s
estate.
B owes A P1,000 representing debt of B’s father.

Compensation was held proper because the

credit of
A is chargeable against the estate under B’s
Requisites of legal
compensation
2. Both debts consists in a sum of money, or of consumable things
of the same kind and quality.

Example
s:
a. A owes B P1,000.

B owes A a n electric range worth

P1,000.

N o compensation will take place.

b. A obliged himself to deliver to B 10 sacks of rice while B
obliged himself to deliver A 10 sacks of corn.

Compensation will not also take place because the

things due are not of the same kind. Neither will there b e
compensation if the obligor of A is to deliver 10 sacks of m a c a n
rice, while that of B is to deliver 10 sacks of w a g w a g rice.
Requisites of legal
compensation
Example
s:
c. A owes B 10 sacks of “wagwag”
rice.
B owes A any 10 sacks of rice;
There c a b b e no legal compensation in this case
because of the lack of identity of the kind a n d quality of
the rice due.
Compensation c a n b e claimed by B since he c a n
deliver any kind of rice. It would b e the same as it B
received 10 sacks of w a g w a g rice from A a n d then
returned the same to A in payment of his debt.
But A cannot set up compensation if op p osed by
Requisites of legal
compensation
Exampl
e:
d. A owes B a specific horse.
B owes A another specific horse.
Compensation cannot b e set up by A or B, unless both
agree.

e. A owes B any
horse B owes A
Compensation
any horse will take place in this case, although the
things
due are not consumable since things due are of the same
kind. As to their quality, Article 1246 governs.
Requisites of legal
compensation
Example
s:

f. A owes B P5,000
B owes A P5,000 or a
cow.

There c a n b e no legal compensation

because B ma y prefer to deliver a cow. But if
the right of choice belongs to A, compensation
will take place.
Requisites of legal
compensation
3. Two debts are due or demandable.

Example:
A owes B P1,000 due today
B owes A P1,000 due next month.
Compensation cannot take place as the debts
are not due on the same date. However, if A has not
yet paid B on the date that the obligation of B
b ec om e s due, there will be compensation on that
date.
Requisites of
legal
compensation
4. The two debts are liquidated.

Example:
A owes B P1,000
B owes A the share of the latter
in a business the amount of which is
still to be ascertained.
Compensation will not take place
as the debt of B is not liquidated.
If part of the debt of B has been
Requisites of legal
compensation
5. No retention or controversy commenced
by a third person.
This is a negative requisite for legal
compensation. The other such requisite is
that the compensation is not prohibited by
law. Of course, compensation will not take
place where there is waiver. There is said to
b e a retention when the credit of one of
the parties is subject to the satisfaction of
the claims of a third person, while a
controversy exists when a third person claims
he is the creditor of one of the parties.
Requisites of legal
compensation
Example:

A owes B
P10,000 B
owes A
P10,000
B also owes C P10,000
C causes the garnishment of the credit of B
against A
a n d notifies A not to p a y B P10,000 as C has a better right
to the
said amount.
B ma y not o w e C but the latter claims that he
a n d not B is the creditor o f A.
In this case, compensation cannot take place
between
 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. (Art. 1280, N C C )
Compensation benefits
guarantor
This article is a n exception to the
general rule that only the principal debtor
c a n set up against his creditor what the
latter owes him.

Although the guarantor is only

subsidiarily, not principally bound, he is
given the right to set up c ompensation.
The reason is that the extinguishment of
the principal obligation as a
consequence of compensation carries
with it the accessory obligations such as
guaranty.
Example:
A owes B P1,000 with G as
guarantor B owes A P1,000

Here, the obligation of guaranty is

extinguished by compensation. But if the
compensation is only partial a n d A cannot
pay the balance, G will b e liable for the
said balance.
 ART. 1281.
Compensation may
be total or partial.
When the two debts
are of the same
amount, there is a
total compensation.
(Art. 1281, N C C )
Total a n d partial
compensation
Total or partial compensation
applies to all different kinds of
compensation.
Total compensation results when
the two debts are of the same amount.
If they are of different amounts,
compensation is total as regards the
smaller debt, a n d partial only with
respect to the larger debt.
 ART. 1282. The
parties may agree
upon the
compensation of
debts which are not
yet due. (Art. 1282,
NCC)
Voluntary
compensation
This provision of law is a n exception to the
general rule that only debts which are due a n d
demandable c a n b e compensated.
Voluntary or conventional compensation
includes any compensation which takes place by
agreement of the parties even if all the requisites
for legal compensation are not present. This kind
of compensation has no special requisites. It is
sufficient that the contract of the parties, which
declares the compensation, is valid.
 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. (Art.
Judicial
compensation
Compensation m a y also take
place when so declared by a final
judgment of a court in a suit. A party
m a y set off his claim for d a m a g e s
against his obligation to the other
party by proving his right to said
d a m a g e s a n d the amount thereof.
Exampl
e: A owes B P1,000. When B
d e m a n d e d payment, A failed to pay.
In anger, B d a m a g e d the property of
A to the extent of P800.
A c a n set off the obligation of B to
p a y him d a m a g e s in the amount of
P800 against his debt of P1,000.
 ART. 1284. When
one or both debts are
rescissible or
voidable, they may
be compensated
against each other
before they are
judicially rescinded or
avoided. (Art. 1284,
NCC)
Compensation of rescissible or
avoidable debts.

Rescissible a n d
avoidable obligations
are valid until they are
judicially rescinded or
avoided. Prior to
rescission or annulment,
the debts ma y b e
compensated against
Exampl
e: D owes C P1,000. Subsequently, D , through fraud
was able to make C sign a promissory note that C is
indebted to D for the same amount.
The debt of D is valid but that of C is voidable.
Before the debt of C is nullified, both debts m a y b e
compensated against e a c h other if all the requisites for
legal compensation are present.
Suppose C’s debt is later on annulled by the court, is
D still
liable considering that compensation h a d already taken
p l a c e ? Yes. The effect of the annulment is retroactive. It
is the sa m e as if there h a d been no compensation.
 ART. 1285. The debtor who has consented
to the assignment of rights made by a creditor in
favor of a third person, cannot set up against the
assignee the compensation which would pertain
to him against the assignor, unless the assignor
was notified by the debtor at the time he gave
his consent, that he reserved his right to the
compensation.

If the creditor communicated the cession

to him but the debtor did not consent thereto, the
latter may set up the compensation of debts
previous to the cession, but not of subsequent
ones.

If the assignment is made without the

knowledge of the debtor, he may set up the
compensation of all the credits prior to the same
and also later ones until he had knowledge of the
assignment. (Art. 1285, N C C )
Where compensation has
taken place before assignment
When compensation takes
effect by operation of law or
automatically, the debts are
extinguished to the concurrent amount.
If subsequently, the extinguished
debt is assigned by the creditor to a
third person, the debtor c a n raise the
defense of compensation with respect
to the debt. The remedy of the
assignee is against the assignor. Of
course, the right to the compensation
m a y b e waived by the debtor before of
Exampl
e: A owes B P3,000 due yesterday.
B owes A P1,000 due also yesterday.
Both debts are extinguished up to the amount P1,000.
Hence, A still owes B P2,000 today.
Now, of B assigns his right to C, the latter c a n collect only
P2,000
from A.
However, if A g a v e his consent to the assignment
before it was m a d e or subsequently, A loses the right to set up
the defense of compensation. So A will b e liable to C for
P3,000 but he c a n still collect the P1,000 o w e d by B. In other
words, the compensation shall b e d e e m e d not to have taken
place.
Where compensation has
taken place after assignment
Article 1285 speaks of three cases of
compensation which take place after a n
assignment of rights m a d e by the creditor:
one, where the assignment is m a d e with
the consent of the debtor; another, where
the assignment is m a d e without the
consent but with the knowledge of the
debtor; a n d the third, where the
assignment is without the knowledge of the
debtor.
Where compensation has
taken place after assignment
1. Assignment with the consent of the debtor.

Example:

A owes B P3,000 due

November 15. B owes A
P1,000 due November 15.
B assigned his right to C on
November 1 with the

consent of A.
O n November 15, A cannot set
up against C, the assignee, the
compensation which would pertain to him against B, the assignor.
Where compensation has
taken place after assignment
2. Assignment with the knowledge but without
the consent of debtor.

Example:
A owes B P1,000 due
November 1. B owes A P2,000
due November 10. A owes B
P1,000 due November 15.
 A assigned his right to C on
November 12. A notified B but the latter did
not give his consent to the assignment.
How much c a n C collect from B ?
B c a n set up the compensation of
debts on November 10 which was before
the cession on November 12. There being
partial compensation, the assignment is
valid only up to the amount of P1,000.
But B cannot raise the defense of
compensation with respect to the debt of
A due on November 15 which has not yet
matured. So, on November 12, B is liable
to C for P1,000.
C o m e November 15, A will b e liable for is
debt of
P1,000 to B.
Where compensation has
taken place after assignment
3. Assignment without the knowledge of the debtor.

Example:
In the preceding example, let us suppose that the
assignment was m a d e without the knowledge of B who
learned of the assignment only on November 16.
In this case, B c a n set up the compensation of credits
before a n d after the assignment. The crucial time is when B
acquired knowledge of the assignment a n d not the date of
the assignment. If B learned of the assignment after the debts
h a d already matured, he c a n raise the defense of
compensation; otherwise, he cannot.
 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
Compensation where debts
payable at different places
This article applies to legal
compensation. The indemnity
contemplated a b o v e doe, not refer to
the difference in the value of the things
in their respective places but to the
expenses of monetary exch an ge (in
case of money debts) a n d expenses
of transportation (in case of things to
b e delivered). O n c e these expenses
are liquidated, the debts also b e c o m e
compensable. The indemnity shall b e
paid by the person who raises the
defense of compensation.
Compensation where debts
payable at different places
Foreign exchange has
been defi ned as the
conversion of a n amount
of money or currency of
one country into a n
equivalent amount of
money or currency of
another. Exchange rate is
the price of one currency
expressed or quoted in
Example
1. A owes B $1,000 payable in New York. B
s: owes A P26,000 (equivalent amount)
payable in Manila.
If A claims c ompensation, he must
p a y for the expenses of exchange.

2. A obliged himself to deliver to B

500sacks of rice in Davao. B is also bound to
deliver A 100 sacks of rice of the same kind in
Bulacan. The expenses for transportation of
the rice to D a v a o amount to P4,000 a n d to
Bulacan P1,000.
If A claims compensation he must
indemnify B the amount of P3,000 for the
expenses of transportation of the rice to
 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
commodatum.
Neither can compensation be set
up against a creditor who has a claim for
support due by gratuitous title, without
prejudice to the provisions of paragraph
2 Article 301. (Art. 1287, N C C )
ART. 1288. Neither shall there be
compensation if one of the debts consists
in civil liability arising from a penal
offense. (Art. 1288, N C C )
Instances when legal compensation
is not allowed by law

1. Where one of the debts

arises from a depositum.- A
deposit is constituted
from the moment a
person receives a thing
belonging to another
with the obligation of
safely keeping it and
Instances when legal compensation
is not allowed by law
Article 1287 uses the word
depositum instead of “deposit” which is
used for a n ordinary bank deposit. A bank
deposit is not a depositum as defined
above. It is really a loan which creates the
relationship of debtor a n d creditor. A
bank’s failure to honor a deposit of money
is failure to p a y its obligation as debtor a n d
not a breach of trust arising from a
depository’s failure to return the thing
deposited. As a general rule, a bank has
a right of set-off of the deposits in its hands
for the payment of any indebtedness to it
on the part of a depositor. Similarly, a
 Example
A owes B P1,000. B, in turn, owes A the
s:
amount of P1,000 representing the value of a ring
deposited by A with B failed to return.

In this case, B, who is the depositary, cannot

claim legal compensation even if A fails to p a y his
obligation. The remedy of B is to file a n action
against A for the recovery of the amount of P1,000.

The relation of the depositary to the

depositors is fiduciary in character since it is based
on trust a n d
confi dence. B’s claim for compensation against A
would
involve a breach of that confi dence.

But A c a n set up his deposit by way of

compensation against B’s credit. This is a n example of
facultative compensation. The benefit granted by law
is available only to A, as depositor, a n d c a n b e waived
Instances when legal compensation
is not allowed by law

2. Where one of the debts

arises from a commodatum.-
C o m m o d a t u m is a
gratuitous contract whereby
one of the parties delivers to
another something not
consumable so that the
latter m a y use the same for
a certain time a n d return it.
Exampl
e: In the preceding example, if B borrowed the
ring of A, B cannot refuse to return the ring on the
ground of compensation because no
compensation c a n take place when one of the
debts arises from a commodatum.
The purpose of the law is to prevent a
breach of trust a n d confi dence on the part of the
borrower (or depositary in a depositum). A,
however, c a n assert compensation of the value
of the ring against the credit of B.
Instances when legal compensation
is not allowed by law
3. Where one of the debts arises from
a claim for support due by gratuitous
title.- “Support comprises everything
that is indispensable for sustenance,
dwelling, clothing, medical
attendance, education a n d
transportation, in keeping with the
financial capacity of the family. x x x”
Example
s:
1. B is the father of A, a minor, who under the law is
entitled to b e supported by B, N ow A owes B P1,000.
B cannot compensate his obligation to support A
by what A owes him because the right to receive
support cannot b e compensated with what the recipient
(A) owes the obligor (B).
The right to receive support cannot b e
compensated because it is
essential to the life of the recipient.
However, if B failed to support A, say, for three
months, the support in arrears m a y b e compensated with
the debt of A.* The reason is that A no longer needs the
support in arrears as he was able to exist even without the
Example
s:
2. A donates to B a n allowance of
P2,000 a month fro five years for the
latter’s support. However, previous to the
donation, B already o w e d A P10,000
which was due a n d unpaid.
In this case, A cannot say to B: “In as
much as you o w e m e P10,000, I will not
p a y your allowance for ten months”.
Instances when legal compensation
is not allowed by law
4. Where one of the debts consists in
civil liability arising from a penal offense.-
“If one of the debts consists in civil
liability arising from a criminal offense,
compensation would b e improper
a n d inadvisable because the
satisfaction of such obligation is
imperative.”
Exampl
e:
D owes C P1,000. C stole
the ring of D worth P1,000.
Here, compensation of C is
not p roper.
But D, the off ended party,
c a n claim the right of
compensation. The prohibition in
Article 1288 pertains only to the
a c c u s e d but not to the victim
of the crime.
 ART. 1289. If a person
should have against him
several debts which are
susceptible of
compensation, the rules
on the application of
payments shall apply to
the order of the
compensation. (Art. 1289,
NCC)
Rules on application of payments
apply to order of compensation
Compensation is similar to
payment. If a debtor has various
debts which are susceptible of
compensation, he must inform the
creditor which of them shall b e the
object of compensation. In case he
fails to d o so, then the
compensation shall b e applied to the
most onerous obligation.
Exampl
e: A is indebted to B in the amount of:
1. P1,000 without interest due today;
2. P1,000 with interest of 18% due also today;
3.P1,000 with interest of 16% due
yesterday. B owes A P1,000 due today.
For purposes of the application of payment, A is the
debtor. He must specify to B which of the three debts should
b e compensated. If he fails to inform B, then the latter should
apply the compensation to the second obligation of A,
namely, the obligation bearing 18% interest because it is the
most onerous obligation.
 ART. 1290. When all the
requisites mentioned in
Article 1279 are present,
compensation takes effect
by operation of law, and
extinguishes both debts to
the concurrent amount,
even though the creditors
and debtors are not aware
of the compensation. (Art.
1290, N C C )
Consent of parties not
required in legal
compensation
From the moment all the requisites mentioned in
Article 1279 concur, compensation takes place
automatically even in the absence of agreement
between the parties, a n d extinguishes reciprocally both
debts to the amount of their respective sums. It takes
place by operation of law from the d a y all the necessary
requisites concur, without n eed of consent on the part of
the parties, a n d even without their knowledge.

As it takes place by operation of law a n d without

a ny act of the parties, it is not required that the parties
have full legal capacity to give or to receive, as the case
m a y be.
NOVATION
 ART. 1291. Obligations
may be modified by:
1.C hanging their
object or principal
conditions;
[Link] the
person of the debtor;
[Link] a third
person in rights of the
creditor. (Art. 1291,
NCC)
Meaning of
Novation
Novation is the extinction of
obligation through the creation of a
an

new one which substitutes it.

It is the substitution or c h a n g e
of an obligation by another, which
extinguishes or modifies the first,
either by changing its object or
principal conditions, or by
substituting another in place of the
debtor, or by subrogating a third
person in the rights of the creditor.
Dual function of
novation.
Novation is a contract containing
two stipulations: one to extinguish or
modify a n existing obligation, the
other to substitute a new one in its
place.
It does not operate as a n absolute
but only as a relative extinction
because it creates a new one in place
of the old which is only “modified”.
Kinds of
Novation
[Link] to origin:

[Link].- that which takes place

by operation of law; or
[Link].- That which
takes place by agreement of
parties.
Kinds of
Novation to how it is constituted:
[Link]

[Link].- when it is so
declared in unequivocal terms.
[Link].- when the old a n d the
new obligations are essentially
incompatible with e a c h other.
Kinds of
Novation
[Link] to extent or effect:

[Link] or extinctive.- when the

old obligation is totally extinguished.
[Link] or modificatory.- when
the old obligation is merely
modified.
Kinds of
Novation
[Link] to the subject:
[Link] or objective.- when the object (or
cause) or principal conditions of the obligation are
changed;
[Link] or subjective.- When the person of the
debtor is substituted and/or when a third person is
subrogated in the rights of the creditor; or
[Link].- when the object and/or principal
conditions of the obligation a n d the debtor or the creditor,
or both the parties, are changed. It is a combination of real
a n d personal novations.
Example
s:
1. Real Novation.- S agreed to deliver
to B a car. Later, they entered into
another contract whereby, instead of
S delivering a car, he would deliver 10
airconditioners. The obligation to deliver
the car is extinguished by the
obligation to deliver the ten
airconditioners. The c h a n g e m a y
involve the principal terms of the
obligation.
Example
s:
2. Personal novation.- If after the
constitution of the obligation, both
parties agreed that C will substitute
for S or that D will b e subrogated in
the rights of B, there is a personal
novation. In this case, C becomes
the new debtor, or D, the new
creditor, as the case ma y be.
Example
s:
3. Mixed novation.- if the
agreement of the parties is that S
will d e liver to D the 10 air
conditioners, instead of S
delivering a car to B, then there is a
mixed novation because the
object of the obligation a n d the
person of the creditor are
changed.
 ART. 1292. In order that
an obligation may be
extinguished by another
which substitutes the same,
it is imperative that it be so
declared in unequivocal
terms, or that the old and
the new obligations be on
every point incompatible
with each other. (Art, 1292,
NCC)
Requisites of
novation
1. A previous valid obligation;
2. Capacity a n d intention of the
parties to modify or
extinguish the obligation;
3. The modification or
extinguishment of the
obligation; a n d
4. The creation of a new
valid obligation.
Novation is not
presumed
Novation is never presumed.
It must b e clearly a n d
unmistakably established either
by the express agreement of the
parties or acts of equivalent
import or by incompatibility of the
two obligations with e a c h other in
every material respect.
Test of incompatibility
between two obligations or
contracts
The test is whether they c a n
stand together, e a c h one having
a n independent existence. If they
cannot, they are incompatible,
a n d the subsequent obligation
novates the first. Upon such
novation, the former obligation
loses all its force a n d e ffect a n d
only the new obligation c a n b e
Example
s:
1. S agreed to deliver to B a car on
November 10. Subsequently, a second
agreement was entered into whereby S
would deliver a truck on November 10. Is
there a novation?
There is no novation becaus e it is not
so declared expressly by the parties in their
second agreement, a n d the two
obligations are not incompatible with e a c h
other because e a c h c a n stand separately.
Example
s:
2. Suppose the obligation of S is to
c onstruct a house on a certain parcel of
land. S agreed to construct a n
apartment in the same parcel of land.
The area of the land is such that both the
house a n d the apartment as per the
building plans cannot b e constructed on
the same site.
There is novation in this ca se even in
the absence of a n express agreement to
 ART. 1293. Novation
which consists in
substituting a new debtor in
place of the original one,
may be made even without
the knowledge or against
the will of the latter, but not
without the consent of the
creditor. Payment by the
new debtor gives him the
rights mentioned in articles
1236 and 1237. (Art. 1293,
Kinds of personal
novation
1. Substitution.- when the
person of the debtor is
substituted.

2. Subrogation.- when a
third person is
subrogated in the
rights of the creditor
Kinds of
substitution.
1. Expromision or that which takes
place when a third person of his
own initiative a n d without the
knowledge or against the will of the
original debtor assumes the latter’s
obligation with the consent of the
creditor. It logically requires the
consent of the third person a n d the
creditor. It is essential that the old
debtor b e released from his
o b ligation; otherwise, there is no
expromision.
Kinds of
substitution
2. Delegacion or that which takes
place when the creditors accepts
a third person to take place of the
debtor at the instance of the latter.
The creditor ma y withhold
approval. In delegacion, all the
parties, the old debtor, the new
debtor, a n d the creditor must
agree.
Right of new debtor who
pays.
1. In expromision, payment by the
new debtor gives him the right
to beneficial reimbursement
under the second paragraph of
Article 1236.
2. If the p a y m ent was m a d e with
the consent of the original
debtor or on his own initiative
(delegacion), the new debtor is
entitled to reimbursement a n d
subrogation under Article
Example
s: 1. Ddebt.
(debtor) tells C (creditor) that T will p a y D’s
C a grees. It does not necessarily
m e a n that there is delegacion here. But if D
tells C that T will p a y his debt a n d he ask C
to release him from his obligation, to which C
agrees, delegacion results.
2. Suppose, in the same example, it is T who
approaches C a n d tells him that T will p a y
the debt of D. C agrees, there is no
expromision in this case, unless there is a n
agreement that D shall be released from his
obligation to C.
 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
original debtor. (Art.
1294, N C C )
Effect of new debtor’s insolvency or non-
fulfillment of the obligation in expromision
In expromision, the new debtor’s
insolvency or non-fulfillment of the
obligation will not revive the action of the
creditor against the old debtor whose
obligation is extinguished by the
assumption of the debt by the new
debtor. Thus, in the second example
above, if there is expromision, D will no
longer b e liable to C in case of
insolvency of T or non-fulfillment by T of
his obligation.
Remember that in expromision, the
 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 the
public knowledge, or known
Effect of new debtor’s insolvency or non-
fulfillment of the obligation in delegation
This article refers to delegacion. It
must b e noted that the article speaks
only of insolvency. If the non-fulfillment
of the obligation is due to other
causes, the old debtor is not liable.
The general rule is that the old
debtor is not liable to the creditor in
case of the insolvency of the new
debtor.
Effect of new debtor’s insolvency or non-
fulfillment of the obligation in delegation
The exceptions are:
1. The said insolvency was already existing a n d of
public knowledge (although it was not known to the
old debtor) at the time of the delegacion; or
2. The insolvency was already existing a n d known to the
debtor (although it was not of public knowledge) at
the time of the delegacion.

The exceptions are intended to prevent fraud on

the part of the old debtor.
Exampl
e: D owes C P1,000. D proposed to C
that T would substitute him as debtor. C
agreed to the proposal.
If, at the time of the delegacion, T was
already insolvent but his insolvency was neither
of public knowledge nor known to D, then D is
not liable. Neither is D liable if the insolvency of T
took place after he delegated his debt.
It is believed that D is also not liable if
C had knowledge that T was insolvent at the
time the debt was delegated to him.
 ART. 1296. When the
principal obligation is
extinguished in consequence
of a novation, accessory
obligations may subsist only
insofar as they may benefit
third persons who did not
give their consent. (Art. 1296,
NCC)
Effect of novation on accessory
obligations
The a b o v e article follows the general rule
that the extinguishment of the principal
obligation carries with it that of the accessory
obligations.
It provides, however, a n exception in the
case of a n accessory obligation created in
favor of a third person which remains in force
unless said third person gives his consent to
the novation. This is so b e c ause a person
should not b e prejudiced by the act of
another without his consent.
Exampl
e: A owes B P2,000 with interest at 14%
B owes C P280.
It was agreed a m o n g the parties
that A would p a y the interest of P280 to C.
In this case, besides the principal obligation
of A, there is a stipulation in favor of C, a
third person. Later on, A a n d B executed
another contract whereby they agreed
that A would deliver to B a television set in
payment of the loan.
Inspite of the novation, the
accessory obligation to p a y the interest of
P280 to C still subsists unless C gives his
 ART. 1297. If the
new obligation is
void, the original one
shall subsists, unless
the parties intended
that the former
relation should be
extinguished in any
Effect where the new obligation
voidArticle 1297 stresses one of the
essential requirements of a novation, to wit:
the new obligation must b e valid. The
general rule is that there is no novation if
the new obligation is void and, therefore,
the original one shall subsist for the reason
that the second obligation being inexistent,
it cannot extinguish or modify the first.
To the rule is excepted the ca se where
the parties intended that the old obligation
Effect where the new
obligation voidable
If the new obligation is
only voidable, novation c a n
take place. But the moment
it is annulled, the novation
must b e considered as not
having taken place, a n d
the original one c a n b e
enforced, unless the intention
of the parties is otherwise.
 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
Effect where the old obligation
void or voidable
This article has its basis
also on the requisites of a valid
novation.
A void obligation cannot
b e novated becaus e there is
nothing to novate. However, if
the original obligation is only
voidable or if the voidable
obligation is validated by
ratification, the novation is
Example
s:
1. S agreed to deliver
prohibited drugs to B.
Later on, it was agreed
that S would p a y B
P100,000 instead of
delivering the drugs.
The novation is void
because the original
Example
s:
2. Suppose S was induced through
fraud committed by B to sign a contract
whereby S obliged himself to deliver a
car to B. Subsequently, it was agreed
between S a n d B that S would give B
P100,000 instead of a car.
The original obligation of S is voidable.
As it has not yet been annulled at the
instance of S, the second contract is valid.
Example
s: 3. In the same example, If S
subsequently confirmed his
obligation to deliver the car
a n d the right of B thereto, his
ratification cleanses the
contract from all its defects
and makes it v a lid a n d,
therefore, the novation is
also v a lid.
 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. (Art. 1299,
Presumption where original
obligation subject to a
condition
If the first obligation is subject to a suspensive or
resolutory condition, the second obligation is d e e m e d
subject to the same condition unless the contrary is
stipulated by the parties in their contract.
The reason for the rule contained in Article 1299 is
that the effi cacy of the new obligation depends upon
whether the condition which a ffects the old obligation is
complied with or not. If the condition is suspensive, a n d it is
not complied with, no obligation arises; a n d if it is resolutory
a n d is complied with, the old obligation is extinguished. In
either case, one requisite of novation , i.e., a previous valid
obligation, would b e wanting.
 ART. 1300.
Subrogation of a third
person in the rights of the
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
Kinds of
Subrogation
1. C o n v e n tional.- when it takes place by express
agreement of the original parties (the debtor
a n d the original creditor) a n d the third person
(the new creditor); or
2. Legal.- when it takes place without agreement
but by operation of law.

Conventional subrogation must b e

clearly established in order that it m a y take
place. Legal subrogation is not presumed
 ART. 1301.
Conventional
subrogation of a
third person
requires the consent
of the original
parties and of the
third person. (Art.
Consent of all parties required
in conventional subrogation
1. The debtor.- becaus e he
becomes liable under the
new obligation to a new
creditor.
2. The old creditor.- becaus e his
right against the debtor is
extinguished.
3. The new creditor.- becaus e
he m a y dislike or distrust the
 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;
2. When a third person, not interested
in the obligation, pays with the
express or 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. (Art. 1302, N C C )
Cases of legal
subrogation
In the three cases
enumerated , subrogation
takes place by operation
of law even without the
consent of the parties.
Note that the
subrogation is produced
from payment:
Cases of legal
subrogation
1. When a creditor pays another creditor
who is preferred.

Example:
A owes B P1,000 secured by a first
mort g a g e on
the land of A. A also owes C P2,000. This
debt is unsecured (or secured by a
second mortgage).
Under the law, B, who is preferred creditor,
has
preference to payment with respect to the land as
against C who is merely a n ordinary creditor. If C
pays
the debt of A to B, C will b e subrogated in B’s right
so
that he c a n have the mortgage foreclosed in
Cases of legal
subrogation
2. When a third person without interest in the obligation
pays with the approval of the debtor.

Example:
A owes B P1,000. C pays B with the express or
implied consent of A.
In this case, C will b e subrogated in the rights of B.
Cases of legal
subrogation
3. When a third person with interest in the
obligation pays even without the knowledge of
the debtor.

Examples:
a. Suppose in the same example, C is the
guarantor of
A. C is a person interested in the fulfillment
of the obligation of A as he would b e
benefited by its extinguishment.
If C pays B even without the knowledge of
A, C is subrogated in the rights of B. Confusion
takes place in the person of C. Hence, the
guaranty is extinguished but the principal
obligation still subsists.
Cases of legal
subrogation
Cont. Examples:
2. A a n d B are joint debtors of C for the
amount of P1,000. Without the
knowledge of A, B pays the debt of
P1,000.
In this case, B becomes a
creditor of A for P500, the latter’s share
of the debt but not for the remaining
P500, the portion of the debt which
corresponds to B, which is extinguished
 ART. 1303. Subrogation
transfers to the person
subrogated the credit with all
the rights thereto
appertaining, either against
the debtor or against third
persons, be they guarantors
or possessors of mortgages,
subject to stipulation in a
conventional subrogation.
(Art. 1303, N C C )
Effect of total
subrogation
The effect of legal subrogation is to transfer to the
new creditor the credit a n d all the rights a n d actions that
could have been exercised by the former creditor either
against the debtor or against third persons, b e they
guarantors or mortgagors. Simply stated, except only for
the c h a n g e in the person of the creditor, the obligation
subsists in all respects as before the novation.
The effect of legal subrogation as provided in Article
1303 m a y not b e modified by agreement. The effects of
conventional subrogation are governed by the stipulation
of the parties.
 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
Effect of partial
subrogation
The creditor to whom partial
payment has been m a d e by the new
creditor remains a creditor to the
extent of the balance of the debt.
In case of insolvency of the
debtor, he is given a preferential right
under the a b o v e article to recover the
remainder as against the new creditor.
Exampl
e: D is indebted to C for P10,000. T pays
C P6,000 with the consent of D. There is
here partial subrogation as to the amount
of P6,000. C remains the creditor with
respect to the balance of P4,000. Thus, two
credits subsist.
In ca se of insolvency of D, C is
preferred to T, that is, he shall b e paid
from the assets of D a h e a d of T.