LECTURE NOTES (ARTICLES 1278 TO 1304)

Section 5 KINDS OF COMPENSATION

COMPENSATION As to cause or origin:
1. Legal – takes place by operation of law and
Art. 1278. – Compensation shall take place when need not be pleaded; if all requirements are
two persons, in their own right, are creditors and present, legal compensation takes place
debtors of each other.
REQUISITES
Compensation – reciprocal extinction of claims a. Each of the obligors is bound principally,
between mutual debtors. (Lao and Manansala vs and that he be at the same time a principal
Special Plans, Inc. GR No. 164791, Jun 29, 2010) creditor of the other

- Extinguishment in the concurrent amount of the b. Both debts consist in a sum of money, or
obligations of those persons who are reciprocally if the things due are consumable, they be
debtors and creditors of each other. of the same kind, and also of the same
quality if the latter has been stated
COMPENSATION VS PAYMENT
COMPENSATION PAYMENT c. Two debts are due
Partial extinguishment Must be complete and
is always permitted indivisible as a rule d. They be liquidated and demandable

True compensation Involves action or e. Over neither of them there be any

takes place by delivery retention or controversy commenced by
operation of law. third persons and communicated in due
time to the debtor (Art. 1279; Associated
Bank vs Tan, GR No. 156940, Dec 14,
COMPENSATION VS MERGER 2004)
COMPENSATION MERGER
There must be two There is only one 2. Voluntary or conventional – due to the
persons who are person in whom is agreement of the parties
mutually creditor and merged the qualities of - Occurs when the parties agree to the
debtor to each other creditor and debtor mutual extinguishment of their credits or
to compensate their mutual obligations
There must be at least There can only be one even in the absence of some of the legal
two obligations obligation requisites. (Mavest (USA) Inc., et al. vs
Sampaguita Garment Corporation, GR No.
127454, Sept 1, 2005)
USEFULNESS OF COMPENSATION
To abbreviate payment which gives to each of the REQUISITES
parties a double advantage: a. Each of the parties can dispose of the
1. Facility of payment credit he seeks to compensate
2. Guaranty for the effectiveness of the credit b. They agree to the mutual establishment of
because if one of the parties pays even their credits (United Planters Sugar Milling
without waiting to be paid by the other, he Co. Inc. vs CA, et al., GR No. 126890, Apr
could easily be made a victim of fraud or 2, 2009)
insolvency
3. Judicial (or “set-off”) – can be made effective
It is simplified or abbreviated payment because the only by a order from the court; must be
two debts are extinguished without requiring the pleaded
transfer of money or property from one party to the
other. 4. Facultative – one of the parties has the choice
of claiming the compensation or of opposing it
(perhaps because not all the requisites of legal
compensation are present)

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LECTURE NOTES (ARTICLES 1278 TO 1304)

E.g. (2) That both debts consist in a sum of money, or if

A owes B P1M due and demandable on Jan the things due are of the same quality if the
12, 2004. B owes A P1M due and demandable latter has been stated;
on or before Jan 31, 2004. On Jan 12, 2004, B (3) That the two debts be due;
who was given the benefit of the term, may (4) That they be liquidated and demandable;
claim compensation because he could then (5) That over neither of them there be any retention
choose to pay his debt on said date, which is or controversy, commenced by third persons
on or before Jan 31, 2004. On the other hand, and communicated in due time to the debtor.
if A claims compensation, B can properly
oppose it because B could not be made to pay AFFIRMATIVE AND NEGATIVE REQUISITES
until Jan 31, 2004. Items 1, 2, 3 and 4 of Art. 1279 are affirmative
requisites for legal compensation; while the following
As to effect or extent: are negative requisites for legal compensation:
5. Total – when the two debts are of the same
amount; hence, complete extinguishment of 1. Item 5 of Art. 1279
obligation 2. There must have been no waiver of the
compensation
6. Partial – when the two debts are not of the 3. Compensation of the debts must not have
same amount; hence, a balance remains on been prohibited by law.
the larger debt
FIRST AFFIRMATIVE REQUISITE
Example where no compensation exists “That each of the obligors be bound principally, and
FACTS: X owns shares of stock in Bank Z worth P10k. that he be at the same time a principal creditor of the
Later, X borrowed money from Bank Z amounting to other.”
P10k including interests. When the loan fell due, X
was not able to pay the loan. X wanted to compensate 1. There must be a relationship of debtor and
the loan with his shares of stock in Bank Z. creditor
2. There must be two debts and two credits
ISSUE: Can debtor’s debt be compensated with the 3. They must be generally bound as principals
shares of stock he owns? and not in their representative capacity, such
as:
HELD: There can be no compensation because the a. Guardians
owning shares of stock does not create a debtor- b. Partners in a partnership
creditor relationship. c. Guarantor

A stockholder’s indebtedness to a banking SECOND AFFIRMATIVE REQUISITE

corporation cannot be compensated with the amount “That both debts consist in a sum of money, or if the
of his shares in the same institution, there being no things due are consumable (fungible), they be of the
relation of creditor with regards to such shares. same kind, and also of the same quality if the latter
(Garcia vs Lim Chu Sing, 59 Phil 562) has been stated.”

NOTE: It would have been different had the The word “consumable” must be taken to mean a
corporation really been his debtor as when he had “fungible” (susceptible of substitution, if such be the
paid it a sum greater than the value of his shares. intention).
(Brimo vs Goldenberg and Co., 40 OG [6th S] No. 10,
p. 199) E.g.
A owes B a fountain pen (generic). B also owes A a
Art. 1279. – In order that compensation may be fountain pen (generic). There can be compensation
proper, it is necessary: here because the objects are fungible (although no
consumable).
(1) That each one of the obligors be bound
principally, and that he be at the same time a Had specific fountain pens be agreed upon, there can
principal creditor of the other; be no compensation (legal compensation).

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LECTURE NOTES (ARTICLES 1278 TO 1304)

Ten sacks of corn cannot be compensation (legal the controversy. There can be no compensation here.
compensation) for ten sacks of rice. Any possible compensation is in the meantime
suspended. If C wins his claim, there can be no
THIRD AFFIRMATIVE REQUISITE compensation; if he loses, the controversy is
“That the debts be due” resolved, and compensation can take place.

“Due” means that the period has arrived, or the Art. 1280. – Notwithstanding the provisions of the
condition has been fulfilled. On the other hand, preceding Article, the guarantor may set up
“demandable” may refer to the fact that neither of the compensation as regards what the creditor may owe
debts has prescribed or that the obligation is not the principal debtor.
invalid or illegal.
GUARANTOR MAY SET UP COMPENSATION WITH
E.g. RESPECT TO PRINCIPAL DEBT
Q: Solita owes Edmundo P1M payable Apr 1, 2005. This is an exception to Art. 1279, par 1, because a
Edmundo owes Solita P1M payable Jun 8, 2005. Can guarantor is subsidiarily, not principally, bound.
there be legal compensation on Apr 1, 2005?
Reason for the law: Extinguishment (partial or total) of
A: No, for one of the debts is not yet due. However, principal obligation extinguishes (partially or totally)
there can be voluntary compensation upon the guaranty (which is merely an accessory
agreement. (Art 1282) obligation).

FOURTH AFFIRMATIVE REQUISITE Example 1

“That they be liquidated and demandable” A owes B P500k. C is the guarantor of A. B owes A
P100k. When B sues A and A cannot pay, for how
Meaning of “demandable,” the same as “due.” much will C be liable?

If one of the debts has already prescribed, there can C will be liable for only P400k, because he can set up
be no compensation for the simple reason that said the P100k credit of A as the basis for partial
debt is no longer demandable. compensation.

“Liquidated” debts are those where the exact amount Example 2

has already been determined, though not necessarily A owes B P500k. C is the guarantor of A. B owes C
in figures since capacity of being arrived at by simple P500k. When B sues A for P500k, may A successfully
arithmetical processes would be enough. If damages put up the defense of compensation in that, after all,
are asked for, and the amount is disputed, the debt his creditor B owes his guarantor C the same
cannot be said to be already a “liquidated” one. Once amount?
liquidated by a judgment, however, a set-off asked for
in a counterclaim would be proper. There can be no compensation here because in the
obligation which C guaranteed for A, C is not bound in
Compensation takes place only if both obligations are his own right. Neither is A the creditor of B.
liquidated. Therefore, it cannot take place if one’s
claim against the other is still the subject of court If A cannot pay and B sues the guaranty, C will not be
litigation. (Salinap vs Judge del Rosario, GR 50638, liable anymore because the obligation of guaranty has
Jul 25, 1983) been extinguished by compensation.

FIRST NEGATIVE REQUISITE Art. 1281. – Compensation may be total or partial.

“That over neither of the debts must there be any When the two debts are of the same amount, there
retention or controversy commenced by third persons is total compensation.
and communicated in due time to the debtor.”
The Article is true for all kinds of compensation,
E.g. whether voluntary, legal, etc.
A owes B P100k and B owes A P100k, but A’s credit
of P100k has been garnished by C who claims to be Art 1282. – The parties may agree upon the
an unpaid creditor of A. B has been duly notified of compensation of debts which are not yet due.

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LECTURE NOTES (ARTICLES 1278 TO 1304)

This Article applies to conventional or voluntary set up the compensation of debts previous to the
compensation. Requisites under Art. 1279 do not cession, but not of subsequent ones.
apply.
If the assignment is made without the knowledge of
It is sufficient in conventional compensation that the the debtor, he may set up the compensation of all
agreement or contract which declares the creditors prior to the same and also later ones until
compensation should itself be valid. Thus, among he had knowledge of the assignment.
other things, the parties must have legal capacity and
must freely give their consent. Assignment of rights – transfer of rights, especially
contractual rights, from one party to another.
Art. 1283. – If one of the parties to a suit over an
obligation has a claim for damages against the Reason for the Article: To prevent fraudulent
other, the former may set it off by proving his right deprivation of benefits of total and partial
to said damages and the amount thereof. compensation.

This Article refers to judicial compensation or set-off. EFFECTS OF ASSIGNMENT OF RIGHTS

Pleading and proof of the counterclaim must be 1. Assignment with consent of debtor (Par 1) –
made. Also, all requisites mentioned in Art. 1270 Compensation cannot be set up because there
must be present except that at the time of pleading, has been consent and therefore, a waiver.
the claim need not yet be liquidated. The liquidation or
the fixing of the proper sum must be made in the EXCEPTION: If the right to compensation that
proceedings. has already taken place is reserved.

Unless pleading and proof are made, the court cannot E.g.
on its own accord, declare the compensation because A owes B P1M. B in turn owes A P200k.
our rules on civil procedure apply suppletorily only. Because both debts are already due, and
Compensation takes place by the judgment as to the because all other requisites for legal
date the compensation was pleaded. compensation are present, both debts are
extinguished automatically up to the amount
Art. 1284. – When one or both debts are rescissible of P200k. Later, however, B, with the consent
or voidable, they may be compensated against each of A, assigned his P1M credit to C. How much
other before they are judicially rescinded or voided. can C collect successfully from A?

Rescissible and voidable debts are valid until A: C can collect from A the whole P1M. A
rescinded or voided; hence, compensation is allowed. cannot set up the defense of compensation as
to the P200k in view of his consent to the
Rescissible contract is based on lesion (damage) assignment.
while voidable contract is based on vitiated consent or
incapacity to give consent. Had A reserved his right to the compensation,
A would be forced to give only P800k.
Rescissible contracts can be found in Article 1381.
Voidable or annullable contracts can be found in NOTE: Par. 1, Art 1285 applies whether the
Article 1390. consent to the cession was BEFORE or AFTER
the debts became compensable.
Art. 1285. – The debtor who has consented to the
assignment of rights made by a creditor in favor of a 2. Assignment made with knowledge but without
third person, cannot set up against the assignee the the consent or against the will of the debtor –
compensation which would pertain to him against Compensation can be set up regarding debts
the assignor, unless the assignor was notified by the previous to the cession or assignment, i.e.
debtor at the time he gave his consent, that he before the NOTICE. Here, legal compensation
reserved his right to the compensation. has already taken place.

If the creditor communicated the cession to him but

the debtor did not consent thereto, the latter may

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LECTURE NOTES (ARTICLES 1278 TO 1304)

E.g. E.g.
A owes B P1M. B owes A P200k. Both debts A owes B P1M payable in Manila and B owes A P1M
are already due. Later, B, with the knowledge payable in England. Whoever claims compensation
but without the consent (or against the will) of must pay for the exchange rate of currency.
A, assigned the P1M credit to C. How much
can C successfully collect from A? Foreign exchange – conversion of an amount of
money or currency of one country into an equivalent
A: If A sets up the defense of partial amount of money or currency of another.
compensation as to previously maturing
debts, C can collect only P800k. There had Art. 1287. – Compensation shall not be proper when
already been compensation with respect to the one of the debts arises from a depositum or from the
P200k. obligations of a depository or of a bailee in
commodatum.
3. Assignment made without knowledge of the
debtor – Debtor can set up compensation as a Neither can compensation be set up against a
defense for all debts maturing PRIOR to his creditor who has claim for support due by gratuitous
knowledge of the assignment, whether the title, without prejudice to the provisions of
debts matured before or after the assignment. paragraph 2 of Article 301.

E.g. WHEN LEGAL COMPENSATION CAN’T TAKE PLACE

Q: A owes B P1M. B owes A P200k. Both 1. When one debt arises from a depositum (not
debts are already due. Later, B assigns the bank deposit, for this is really a loan)
P1M credit to C, without the knowledge of A. - Purpose is to prevent breach of trust and
This assignment was made on Jul 1. On Jul confidence.
15, a P250k debt of B in favor A matured. A - It is the depositary who cannot claim
learned of the assignment on Aug 1. On Aug compensation. The depositor is allowed to
23, a P150k debt of B in favor of A matured. so claim
Later, C asks A to pay his debt. How much - Deposit is constituted from the moment a
can C successfully collect from A? person receives a thing belonging to
another, with the obligation of safely
A: C can collect P550k because A can set up keeping it and of returning the same. If the
defense of partial compensation regarding the safekeeping of the thing delivered is not
P200k and the P250k debts, or the debts the principal purpose of the contract, there
which had matured and were therefore is no deposit but some other contract.
compensable PRIOR to his knowledge of the (Art. 1962)
assignment. But A cannot setup the last dept
of P150k for partial compensation because 2. When one debt arises from the obligations of
this matured only AFTER he knew of the a depositary. This has the same reason as the
assignment. preceding one. Depositor is given the right to
claim compensation.
Art. 1286. – Compensation takes place by operation
of law, even though the debts may be payable at 3. When one debt arises from the obligations of
different places but there shall be an indemnity for a bailee in commodatum, the borrower of a
expenses of exchange or transportation to the place property who pays nothing for the loan.
of payment. - Lender may claim compensation, the
borrower is not allowed to do so.
COMPENSATION BY OPERATION OF LAW - In the three instances given above, since
- “Indemnity for expenses of transportation” the depositor and the lender have an
applies to transportation of goods or of the object option to claim or not to claim
- “Indemnity for expenses of exchange” refers to compensation, we have clear instances of
monetary exchange in case the debts are money facultative compensation.
debts

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LECTURE NOTES (ARTICLES 1278 TO 1304)

4. When one debt arises because of a claim for Art. 1289. – If a person should have against him
support due to gratuitous title several debts which are susceptible of
- Support in arrears may be compensated compensation, the rules on the application of
but not future support, for this is vital to payments shall apply to the order of the
the life of the recipient. compensation.
- While compensation cannot be made use
by one party (e.g., the depositary), Cross-refer to provisions of the Civil Code on
compensation may be claimed by the Application of Payments (Arts. 1252 to 1254)
other party (e.g. the depository). This kind
of compensation, whereby only one side Read the case of Steve Tan & Marciano Tan vs Fabian
can claim it but not the other, is referred Mendez, Jr., GR No. 138669, Jun 2, 2002.
to as facultative compensation.
Art. 1290. – When all requisites mentioned in Article
5. Debts consists in civil liability arising from 1279 are present, compensation takes effect by
penal offense. operation of law, and extinguishes both debts to the
concurrent amount, even though the creditors and
Example 1 debtors are not aware of the compensation.
A has a P1M savings deposit with PNB. One day, A
borrowed P200k from PNB. Without asking AUTOMATIC COMPENSATION IF ALL REQUISITES
permission from A, the bank deducted P200k from ARE PRESENT
A’s account, leaving a balance of P800k in A’s favor. Legal compensation takes place automatically unless
Is the bank’s action proper. there has been valid waiver thereof.

Yes. Compensation is allowed here because in this Compensation which extinguishes principal
case, the relationship between the bank and the obligations also extinguishes accessory obligations.
depositor is that of debtor and creditor. (Art. 1980) “To the concurrent amount” means that if one debt is
larger than the other, the balance subsists as debt.
Example 2
A asked B to keep P1M for him. Now, A is indebted to For application of Art. 1290, read the following:
B for the amount of P400k. When A asks for the 1. International Corporate Bank, Inc. vs IAC, et
return of his money, B gives him only P600k, alleging al., GR No. 69560, Jun 30, 1988
partial compensation. Is B correct? 2. BPI and Romero vs CA and Reyes, GR No.
116792, Mar 29, 1996
No, B is not correct because the P1M deposit with
him is not subject to compensation. (Art. 1287, p1) Section 6
NOVATION
Art. 1288. – Neither shall there be compensation if
one of the debts consists in civil liability arising from Art. 1291. – Obligations may be modified by:
a penal offense. (1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
REASON FOR THE PROVISION (3) Subrogating a third person in the right of the
Satisfaction of such obligation is imperative. creditor.

VICTIM CAN CLAIM COMPENSATION Novation – substitution or change of an obligation by

While the criminal cannot claim compensation, the another, which extinguishes or modifies the first,
victim is allowed to do so. This should be specifically either changing its object or principal condition, or
limited to the accused to prevent his escaping liability substituting another in place of the debtor, or
by pleading prior credits against that of the offended subrogating a third person in the right of the creditor.
party. But not to the victim of a crime who happens to
be indebted to the accused. (Justice JBL Reyes) This - It is a mode of extinguishing an obligation by
is an instance of facultative compensation. changing the object or principal creditor or by
substituting the person of the debtor.

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LECTURE NOTES (ARTICLES 1278 TO 1304)

- Burden to prove the defense that an obligation KINDS OF NOVATION

has been extinguished by novation falls on the As to object or purpose
debtor. (Agrifina Aquintey vs Spouses Tibong, GR 1. Real or objective – changing the object or the
No. 166704. Dec 20, 2006) principal conditions of the obligation (Art. 1291,
par1)
- No form of words or writing required
2. Personal or subjective – change of persons
REQUISITES a. Substituting the person of the debtor
1. Existence of a valid old obligation (expromision)
- If old obligation is void, there is nothing to b. Subrogating a third person in the
novate rights of the creditor (change of
- If old obligation is voidable, novation is still creditor may be by agreement –
possible provided the obligation has not “conventional subrogation,” or by
yet been annulled. operation of law – “legal subrogration”)

2. Intent to extinguish or to modify the old 3. Mixed – Made either by changing the object or
obligation by a substantial difference the principal conditions and by substituting the
(extinguishment or modification itself is a person of the debtor or subrogating a third
result of novation) person to the rights of the creditor.

3. Capacity and consent of all parties, except in E.g.

the case of expromision where the old debtor X obliged himself to deliver a particular laptop to Y.
does not participate Subsequently, X and Y agreed that instead of
delivering the laptop, X will deliver two particular
4. Validity of the new obligation cellphones to W. Note that there is a change in the
- If the new obligation is subject to a person of the creditor and the object of the obligation.
suspensive condition, such as the
obtaining of some signatures, and the According to the form of its constitution
condition does not materialize, such new 1. Express – new obligation declares in
obligation never became valid or effective, unequivocal terms that the obligation is
so no novation has resulted. (Martinez vs extinguished
Cavives, 25 Phil 581)
2. Implied - when the two obligations are
- If the contemplated new obligation is essentially incompatible with each other
embodied in a mere draft, which is
unsigned and therefore not consented to, Test of incompatibility – whether the two
no new obligation is created because of obligations can stand together, each one with
the absence of novation. (Vaca vs Kosca, its own independent existence. If they cannot,
26 Phil 388) they are incompatible and the latter obligation
novates the first. Corollarily, changes that
Boysaw, et al. vs Interphil Promotions, et al. breed incompatibility must be essential in
GR No. 22590, Mar 20, 1987 nature and not merely accidental. The
incompatibility must take place in any of the
The consent of the creditor to the change of debtors essential elements of the obligation, such as
whether in expromision or delegacion, is an its object, cause or principal conditions;
indispensable requirement. Substitution of one debtor otherwise, the change would be merely
for another may delay or prevent the fulfillment of the modificatory in nature and insufficient to
obligation by reason of the inability or insolvency of the extinguish the original obligation.
new debtor. Hence, the creditor should agree to accept
the substitution in order that it may be binding on him. According to extent or effect
1. Total or extinctive novation – old obligation is
completely extinguished

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LECTURE NOTES (ARTICLES 1278 TO 1304)

2. Partial or modificatory – imperfect or improper W maintained that her obligations under the various
novation checks had been released spearheaded and novated
by her husband’s assumption of her liabilities.
Here, the old obligation is merely modified;
thus, it still remains in force except insofar as ISSUE: Had novation taken place?
it has been modified. Should there be any
doubt as to whether the novation is total or HELD: The novation which W suggests as having
partial, it shall be presumed to be merely taken place, whereby H was supposed to assume her
modificatory. obligation as debtor, is neither express nor implied.
There is no showing of Y explicitly agreeing to such a
E.g. substitution, nor of any act of her from which an
There was novation of the terms of the three inference may be drawn that she had agreed to
promissory notes in that the interest was waived and absolve W from her financial obligations and to
the principal was payable in monthly installments of instead hold H fully accountable. (Azarcon vs People
USD750. Alterations of the terms and conditions of of the Philippines and Gonzales, GR No. 185906, Jun
the obligation would generally result only in 29, 2010)
modificatory novation unless such terms and
conditions are considered to be the essence of the Art. 1292. – In order that an obligation may be
obligation itself. The resulting novation in this case extinguished by another which substitutes the same,
was, therefore, of the modificatory type, not the it is imperative that it be so declared in unequivocal
extinctive type, since the obligation to pay a sum of terms, or that the old and the new obligation be on
money remains in force. every point incompatible with each other.

As to origin HOW IMPLIED NOVATION IS MADE

1. Legal – takes place by operation of law By making substantial changes:
1. In the object or subject matter of the contract
2. Conventional – takes place by stipulation of (e.g. delivery of a car instead of a diamond
parties. ring)
2. In the cause or consideration of the contract
E.g. (e.g. an upward change in the price);
Q: W had been borrowing money from Y who was reduction of prince implies a remission
engaged in informal money lending. Between the 3. Principal terms or conditions of the contract,
months of August to December 1992, as was usual in e.g:
the normal course of their transactions, W issued a. Debt subject to a condition is made an
several checks payable to Y, in exchange for cash absolute one without a condition
received. Due to business reverses suffered by W, the b. Reduction of the term or period
checks were, however, dishonored for the reason that originally stipulated
the “Account Closed.” c. Without the consent of some
subscribers, the capital stock of a
Y demanded from W the settlement of her P749k corporation is increased. Here, the
obligation. subscribers who did not consent to the
increase are released or freed from
W’s husband, H, later paid the amount of P200k their subscription
representing initial payment on the account of W with
the undertaking to settle the balance within one year NOTE: Novation thru change of the object, cause or
via monthly installments. principal terms and conditions is not presumed. Clear
proof of novation must be given.
More than two and a half years later, as W had not
settled her outstanding obligation, Y filed on INSTANCES WHEN THE COURT HELD THAT THERE
September 4, 1996, a complaint for violation of BP 22 WAS NO EXTINCTIVE NOVATION
against her involving 120 dishonored checks (here, the original contract or obligation remains,
amounting to P746,250. subject only to the slight modifications introduced.
Here, only a modificatory novation has been effected.

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LECTURE NOTES (ARTICLES 1278 TO 1304)

1. Slight alterations or modifications in the Art. 1293. – Novation which consists in substituting
construction plans of a building a new debtor in the place of the original one, may be
made even without the knowledge or against the will
2. New contract merely contains supplementary of the latter, but not without the consent of the
agreement creditor. Payment by the new debtor gives him the
rights mentioned in Articles 1236 and 1237.
3. Additional interest is agreed upon
KINDS OF PERSONAL OR SUBJECTIVE NOVATION
4. Additional security is given 1. Change in debtor (passive)
2. Change in creditor (active
5. After a final judgment, a contract was entered
into precisely to provide a method of payment NOTE: A substitution of debtor without the consent of
other than that stated in the judgment the creditor is binding upon the parties to the
substitution but not on the creditor. (De Cortes vs
But the SC held that if the object of the new Venturanza, 79 SCRA 709)
contract is to settle the judgment by reducing
the amount stated in the judgment, and by SUBSTITUTION OF DEBTOR
stipulating an attorney’s fees in case of non- 1. Expromision – initiative comes from a third
payment, and by inserting a penalty clause, person; essential that the old debtor be
the judgment may be considered to have been released from his obligation, otherwise, there
novated. (Fua Cam Lu vs Yap Fauco, 74 Phil will be no expromision, no novation.
287)
REQUISITES
6. When a guarantor enters into an agreement 1. Initiative must come from a third person who
with the creditor that the guarantor will also be will be the new debtor
a principal debtor. Here, the original principal 2. New debtor and the creditor must consent
debtor is not released from his obligation. 3. Old debtor must be excused or released from
his obligation. The old debtor’s consent or
7. When the creditor in the meantime refrains knowledge is not required. (Art. 1293)
from or forbears from suing the debtor, or
even when the creditor merely extends the E.g.
term of payment, for here, the period merely D owes C P1M. F, friend of D, approaches C and tells
affects the performance, not the creation of him, “I will pay you what D owes you. From now on,
the obligation. consider me your debtor, not D. D is to be excused. C
agrees. There is expromision here.
However, guarantors who do not consent to
the extension of term are released from their E.g.
obligation of guaranty by express provision of D owes C P1M. F, friend of D, approaches C and tells
the law, and not because of any extinctive him, “I will pay you what D owes you.” C agrees.
modification. There is NO EXPROMISION, no novation because they
did not agree that D would be released from his
8. Place of payment is changed or when there is obligation. If F does not pay C, C will still be allowed
a variation in the amount of partial payment to collect from D.

9. Public instrument is executed to confirm a 2. Delegacion – initiative comes from the debtor,
valid contract, whether oral or in a private for it is he who delegates another to pay the
instrument debt, and thus, he excuses himself. Here, the
parties concerned – the old debtor, the new
10. Payment of the purchase price for certain debtor, and the creditor – must agree. Old
trucks is made by the execution of a debtor must be released from the obligation;
promissory note for said price. Here, there is otherwise, there is no valid delegacion.
no novation of the contract of sale.

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LECTURE NOTES (ARTICLES 1278 TO 1304)

PARTIES IN DELEGACION WHY THE OLD DEBTOR WILL NOT BE RESPONSIBLE

1. Delegante – original debtor FOR NEW DEBTOR’S INSOLVENCY OR NON-
2. Delegatario – creditor FULFILLMENT
3. Delegado – new debtor The expromision was brought about without old
debtor’s initiative.
REQUISITES OF DELEGACION
1. Initiative comes from old debtor Art. 1295. – The solvency of the new debtor, who
has been proposed by the original debtor and
2. All parties concerned must consent or agree. accepted by the creditor shall not revive the action
Consent of the creditor: of the latter against the original obligor, except
a. May be given in any form when said insolvency was already existing and of
b. May be express, or may be implied public knowledge, or known to the debtor when he
from his acts but not from his mere delegated his debt.
acceptance of payment by a third
party, for there is no true transfer of This Article refers to delegacion. It only deals only
the debt here. with insolvency, and not with other causes of non-
c. May be before or after the new debtor fulfillment.
has given his consent
d. May be conditional but the condition REQUISITES TO HOLD OLD DEBTOR LIABLE
has to be fulfilled, otherwise, there is 1. Insolvency was already existing and of public
no valid delegacion. knowledge at the time of delegacion.

RIGHTS OF THE NEW DEBTOR 2. Insolvency was already existing and known to
1. Beneficial reimbursement (Art 1236) if the debtor at the time of delegacion.
payment was made without the knowledge or
against the will of the old debtor NOTE: If the insolvency occurred only after the
delegacion, the old debtor is not liable.
2. Reimbursement and subrogation (Art 1237) if
it was made with the old debtor’s consent. E.g.
X owes Y P10k. Subsequently, X asked Y if the latter
E.g. would agree that his brother Z will pay the P10k
X owes Y P10k. Subsequently, X asked Y if the latter obligation of X so that Z will become the new debtor
would agree that his brother Z will pay the P10k and that X will be released from his obligation. Y
obligation of X so that Z will become the new debtor agreed. Also, Z consented. In this case, the obligation
and that X will be released from his obligation. Y is extinguished because of delegacion so that if Z
agreed. Also, Z consented. In this case, the obligation later on becomes insolvent, X is no longer liable.
is extinguished because of delegacion so that if Z
later on will not pay, X is no longer liable. Take note However, X will still be liable if said insolvency of Z
that the initiative of paying comes from the old was already existing and of public knowledge when X
debtor, X, himself. delegated the debt. Also, X will still be liable if said
insolvency is known to X when he delegated the debt.
Art. 1294. – If the substitution is without the
knowledge or against the will of the debtor, the new Art. 1296. – When the principal obligation is
debtor’s insolvency or non-fulfillment of the extinguished in consequence of a novation,
obligation shall not give rise to any liability on the accessory obligations may subsist only insofar as
part of the original debtor. they may benefit third persons who did not give their
consent.
This refers to expromision where the new debtor’s
insolvency or non-fulfillment of the obligations shall EFFECT OF NOVATION OF A PRINCIPAL OBLIGATION
not give rise to any liability on the part of the original ON ACCESSORY OBLIGATIONS
debtor because of the initiative came from a third General Rule: When the principal obligation is
person. extinguished in consequence of a novation, the
accessory obligations are also extinguished.

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LECTURE NOTES (ARTICLES 1278 TO 1304)

Exception: Accessory obligations or stipulations made A: No, because the original obligation had already
in favor of third persons (stipulation pour autrui [Art been extinguished by the valid novation. Moreover,
1311]) remain unless said third persons have their the obligation to deliver the particular car is also
consent to the novation. extinguished because of the fortuitous event.

REASON FOR THE EXCEPTION Art. 1298. – The novation is void if the original
Their rights to the accessory obligations which for obligation was void, except when annulment may be
them is really a distinct one, should not be prejudiced claimed only by the debtor, or when ratification
without their consent. validates acts which are voidable.

Stipulation pour autrui will be discussed further in EFFECT IF OLD OBLIGATION WAS VOID
Article 1311. There is no valid obligation. If the old obligation was
merely VOIDABLE and has already been annulled,
Art. 1297. – If the new obligation is void, the original there is no more obligation. Therefore, the novation is
one shall subsist, unless the parties intended that also void.
the former relation should be extinguished in any
event. RULE IF THE OLD OBLIGATION WAS VOIDABLE
If the old obligation was voidable and has not yet
EFFECT IF THE NEW OBLIGATION IS VOID been annulled, there may still be a valid novation.
There is no novation. Old obligation generally
subsists. 1. Annulment may be claimed only by the debtor

OTHER FACTORS E.g.

1. If the new obligation is subject to a condition A was forced to sign a sign a promissory note to give
and said condition does not materialize, the B P500k. Later, the parties agreed voluntarily to let
old obligation subsists. (Martinez vs Cavives, the subject matter be a precious stone. Although the
25 Phil 581) first contract was voidable, the second one is all right
because in the first contract, annulment could be
2. If a new obligation was intended, but the new claimed only by the debtor.
contract was never perfected for lack of
consent, old obligation continues. (Vaca vs 2. Or when ratification validates acts which are
Kosca, 26 Phil 388) voidable

3. If new obligation is voidable, old obligation is E.g.

novated because a voidable obligation is valid An agent, acting without the authority from his
until annulled. principal, bought merchandise from a company.
Shortly after he had learned of his agent’s act, the
4. If the new obligation is annulled, the old principal told the seller to deliver another kind of
obligation subsists, and whatever novation has merchandise, completely different from the first. The
taken place will naturally have to be set aside. seller agreed. Although the first contract was
unauthorized, ratification by the principal has cured its
EXCEPTION TO THE GENERAL RULE THAT THERE IS defects, and therefore the second contract is valid.
NO NOVATION IF THE NEW OBLIGATIONI IS VOID
When the parties intended that the former relation NOTE: Although Art 1298 speaks of a “void” original
should be extinguished in any event. (Art 1297) obligation, it evidently refers to a “voidable” one,
where annulment or ratification may exist. A void
E.g. contract does not have to be annulled nor can it be
Q: D and C entered into a contract whereby D was to ratified.
give C P800k cash. Later, they novated the contract
by stipulating that instead of cash, D would give a RULE IF THE OLD OBLIGATION WAS EXTINGUISHED
particular car. Subsequently, the car was destroyed BY LOSS
by a fortuitous event. Is D obliged to give P800k? If the loss was purely because of a fortuitous event
without liability on the part of the debtor, the novation
is VOID for there would be no obligation to novate.

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LECTURE NOTES (ARTICLES 1278 TO 1304)

If the loss made by the debtor liable, there is still an KINDS OF SUBROGATION
existing monetary obligation that may be the subject From the viewpoint of cause or origin
of novation. 1. Conventional or voluntary subrogation –
requires an agreement and the consent of the
PRESCRIBED OBLIGATION MAY BE SUBJECT OF original parties and of the creditor (Art 1301)
NOVATION
Failure to raise prescription amounts to a waiver. 2. Legal subrogation – takes place by operation
of law
EFFECT ON A VOIDABLE OBLIGATION OF NOVATION
BY EXPROMISION From the viewpoint of extent
Here, the debtor is released from his obligation to the 1. Total subrogation
creditor, for the substitution was not done through his
initiative. But when the new debtor, after payment, 2. Partial subrogation – needs two or more
sues the old debtor for beneficial reimbursement, the creditors
old debtor can set up whatever defenses he could
have set against the creditor (such as minority or *Legal subrogation is not presumed, except in the
fraud). case expressly mentioned in the law.

Art. 1299. – If the original obligation was subject to *Conventional subrogation must be established.
a suspensive or resolutory condition, the new Otherwise, it is as if no subrogation has taken place.
obligation shall be under the same condition, unless
it is otherwise stipulated. Art. 1301. – Conventional subrogation of a third
person requires the consent of the original parties
GENERAL RULE: Conditions attached to the old and of the third person.
obligation are also attached to the new obligation.
NOTE:
EXCEPTION: If there is contrary stipulation. For conventional or voluntary subrogation, consent of
all the parties is required:
E.g. 1. The debtor – because he becomes liable
X obliged himself to give Y a cellphone if Y passes the under the new obligation; and because his old
CPA board exam. Subsequently, X and Y agreed that obligation ends
instead of giving a cellphone, X will give a specific
laptop. Is the giving of the laptop subject to the same 2. Old creditor – because his credit is affected
suspensive condition (passing the CPA board exam)?
Yes, X will deliver the laptop only if X Y passes the 3. New creditor – because he becomes a party to
CPA board exam. the obligation

Art. 1300. – Subrogation of a third person in the Generally, the debtor loses the right to present
rights of the creditor is either legal or conventional. against the new creditor any defense which the
The former is not presumed, except in cases debtor could have set up against the old creditor.
expressly mentioned in this Code; the latter must be
clearly established in order that it may take effect. As between conventional subrogation and assignment
of credit, the latter, insofar as the creditor is
Subrogation – (otherwise known as “extinctive concerned, should be preferred, for it has advantages
subjective novation by change of the creditor”) the without the corresponding disadvantages of
transfer to a third person of all the rights appertaining conventional subrogation. Upon the other hand,
to the creditor, including the right to proceed against conventional subrogation cannot present any
guarantors, or possessors of mortgages, subject to advantage over assignment of credit.
any legal provision or any modification that may be
agreed upon.

- Transfer of all the rights of the creditor to a third

person, who substitutes him in all his rights.

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LECTURE NOTES (ARTICLES 1278 TO 1304)

CONVENTIONAL SUBROGATION vs 3. When, even without the knowledge of the

ASSIGNMENT OF RIGHTS debtor, a person interested in the fulfillment
CONVENTIONAL ASSIGNMENT OF of the obligation pays, without prejudice to
SUBROGATION CREDIT the effects of confusion as to the latter’s
Extinguishes the Mere transfer of the share.
obligation, and creates same right or credit;
a new one the transfer did not This Article speaks of a legal subrogation.
extinguish the credit
Example of Par. 1
Requires the debtor’s Does not require the X owes Y P500k secured by a real estate mortgage. X
consent debtor’s consent; mere also owes Z P200k. The obligation of X to Z has no
notification to him is guaranty or security. Later, Z (ordinary creditor) pays
sufficient Y the P500k debt of X. In this case, Z will be
subrogated in the rights of Y which means that Z can
Defect of the old Defect in the credit or foreclose the mortgage in case of default by X.
obligation may be cured right is not cured
in such a way that the simply by assigning the Example of Par. 2
new obligation same; here, the debtor X owes Y P500k secured by a real mortgage. Z paid Y
becomes entirely valid. generally still has the the amount of P500k with the consent of X. In this
Here, there is no right right to present against case, Z is subrogated in the rights of Y.
to present against the the new creditor any
new creditor any defense available as Example of Par. 3
defense which he, the against old creditor. X owes Y P500k secured by a real estate mortgage. It
debtor could have set is also secured by G, as guarantor. If G pays Y the
up against the old amount of P500k, G will be subrogated in the rights of
creditor Y. Moreover, the contract of guaranty is extinguished.
Take note that G, being the guarantor is a person
Transfer of all rights of An agreement by virtue interested in the fulfillment of the obligation.
the creditor to a third of which, the owner of
person, who substitutes a credit (the assignor), Art. 1303. – Subrogation transfers to the person
him in all his rights by a legal cause – such subrogated the credit with all the rights thereto
which takes place by as sale, dation in appertaining, either against the debtor or against
agreement of the payment or exchange third persons, be they guarantors or possessors of
parties or donation – and mortgages, subject to the stipulation in a
without need of the conventional subrogation.
debtor’s consent,
transfer that credit and EFFECTS OF SUBROGATION
its accessory rights to Credit and all the appurtenant rights, either against
another (the assignee), the debtor, or against third persons, are transferred.
who acquires the power Thus, in a sense, the obligation subsists, i.e., it has
to enforce it, to the not yet been extinguished or paid
extent as the assignor
could have enforced it EXAMPLE OF THE EFFECT OF SUBROGATION
against the debtor. D owes C P1M. G is the guarantor. A stranger, S, paid
C the P1M with the consent of D and C. S is now
Art. 1302. – It is presumed that there is legal subrogated in the place of C. If D cannot pay the
subrogation: P1M, S can proceed against the guarantor, G.
1. When a creditor pays another creditor who is
preferred, even without the debtor’s EFFECT OF PRESENCE OF SUSPENSIVE CONDITION
knowledge; It is understood that if the transferred credit is subject
to a suspensive condition, the new creditor cannot
2. When a third person, not interested in the collect until after said condition is fulfilled.
obligation, pays with the express or tacit
approval of the debtor;
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LECTURE NOTES (ARTICLES 1278 TO 1304)

Art. 1304. – A creditor, to whom partial payment has

been made, may exercise his right for the
remainder, and he shall be preferred to the person
who has been subrogated in his place in virtue of
the partial payment of the same credit.

Partial subrogation – Here, there are two creditors:

1. The old creditor who still remains a creditor as
to the balance, because only a part of the
payment has been made to him; and

2. The new creditor who is a creditor to the

extent of what he had paid the creditor.

E.g.
Q: A owes B P500k. With the consent of both, C pays
B P250k. Now B and C are the creditors of A to the
amount of P250k. Suppose A has only P250k, who
should be preferred

A: B, the original creditor, should be preferred

inasmuch as he is granted by the law (Art 1304)
preferential right to recover the remainder, over the
person subrogated in his place by virtue of the partial
payment of the same credit.

PREFERENCE IN THE ASSETS

The preference is only in the assets remaining with
the debtor, not those already transferred to others.
Therefore, the old creditor must assert his claim or
preference over the assets only while they are still in
the hands of the sheriff who has levied on the
properties. If done later, the preference given by this
Article ceases.

Page 14 of 14