Notes on Law on Obligations and Contracts

Compensation can be full or partial

(Session 7)
Meaning: Two parties who are reciprocally principal
Confusion or Merger of Rights debtors and creditors of each other.
Ex 1. A owes B the amount of P1,000.00
Ex 1. D owes C P1,000.00 for which D executed a
negotiable promissory note1 in favor of C. C indorsed the B owes A the amount of P700.00.
note to X who, in turn, indorsed it to Y. Now, Y bought
goods from the store of D. Instead of paying cash, Y just Here compensation takes place partially, that is, to the
indorsed the promissory note to D. concurrent amount of P700.00. So, A shall be liable to B
for only P300.00. If the two debts are of the same amount,
Here, D owes himself. Consequently, his obligation is there is total compensation.
extinguished by merger.
If A has a guarantor, the guarantor is only liable to the
Ex 2. W (wife) has a claim against H (husband) for the extent of remaining balance which is P300.
support of their children C, etc. Subsequently, W died. H
also died later Ex 2. A owes B P10,000.00 with C as guarantor.

Since C, etc. as heirs of W (creditor) are also heirs of H B owes C P10,000.00.

(debtor), the obligation sued upon is extinguished. There will be no compensation between B and
Effect of merger in the person of principal debtor or C(guarantor) because while B is principally liable to C, C is
creditor. not principally liable to B. Hence, C can demand payment
from B.
Merger in the person of the principal debtor or creditor
extinguishes the obligation and the following accessory. Ex 3. A owes B P10,000.00. B owes A P10,000.00, the
latter as guardian or administrator
Confusion in a joint obligation.
There will also be no compensation. In this case, A is
The confusion will extinguish only the share corresponding personally liable to B, while B is not principally liable to A.
to the creditor or debtor in whom the two characters The real creditor of B is the ward under guardianship. A is
concur creditor of B in a representative capacity.
Ex 1. A, B, and C are jointly liable to D in the amount of Ex 4. A owes B, C, D (partners in partnership P) P1,000.
P9,000.00 evidenced by a negotiable promissory note. D
endorsed the note to E, who, in turn endorsed it to A. P (partnership) owes A P1,000

In this case, A’s share in the obligation is extinguished A cannot set up compensation because B, C, D are not
because of confusion in his person, However, both B and principally liable to A.
C is still in debt in the amount of P3,000. B and C would Ex 5. A owes B P10,000.00 in the latter’s capacity as
be liable to A as the new creditor. administrator of the estate of his (B’s) father.
Confusion in a solidary obligation B owes A P10,000.00 representing debt of B’s father.
Merger in the person of one of the solidary debtors shall Compensation was held proper because the credit of A is
extinguish the entire obligation because every debtor is chargeable against the estate under B’s administration.
liable to the entire obligation. While, he, who made the
payment, can claim reimbursement from the others.
Ex 1. In the example given, if the obligation of A, B, and C Kinds of Compensation
is solidary, the endorsement to A extinguishes the entire
obligation of P9,000.00. A can demand reimbursement By its cause or origin:
from B and C.
Legal - takes place by operation of law even without when
It is as if A paid the entire debt. He can, therefore, collect all requisites are present event without the knowledge of
the proportionate shares belonging to B and C on an both parties.
implied contract of reimbursement.
Conventional - when it takes place by agreement of the
parties. It has no special requisites, it takes place by
End. agreement of the parties even if all requisites are note
present.
Judicial - when it takes place by order from a court in a
litigation. A party may set off his claim for damages against
his obligation to the other party by proving his right to said
damages and the amount thereof.
Ex 1. D owes C P10,00. When C demanded payment, D C causes the garnishment of the credit of B against A and
failed to pay. In anger, C damaged the property of D to the notifies A not to pay B P10,000.00 as C has a better right
extent of P8,000. to the said amount.
D can set off the obligation of C to pay him damages in the B may not owe C but the latter claims that he and not B is
amount of P8,000 against his debt of 10,000 the creditor of A
Facultative - when it can be set up only by one of the In this case, compensation cannot take place between A
parties. and in view of a controversy commenced by C, a third
person. In the meantime, the compensation is suspended.
If C loses the case, compensation shall be deemed to
Element 2 of Compensation: That both debts consist in a have taken place as of the date the requisites for legal
sum of money, or if the things are due are consumable, compensation concurred.
they be of the same kind, and also of the same quality if
the latter has been stated Note: If a debtor has various debts which are susceptible
of compensation, he must inform the creditor which of
Ex 1. A owes B P10,000.00. them shall be the object of compensation. In case he fails
B owes A an electric range worth P10,000.00 to do so, then the compensation shall be applied to the
most onerous obligation.
No compensation will take place as it is not the same kind.
Ex 2. A owes B 10 sacks of “wagwag” rice. End.
B owes A any 10 sacks of rice Novation is the total or partial extinction of an
There can be no legal compensation in this case because obligation through the creation of a new one which
of the lack of identity of the kind and quality of the rice substitutes it. It is never assumed and must be declared in
due. Compensation can be claimed by B since he can a clear terms.
deliver any kind of rice. But A cannot set up compensation
Note: The burden of establishing a novation is on the
if opposed by B. This is an example of facultative
party who asserts its existence.
compensation.
Kinds of Novation
According to extent or effect
Element 3 of Compensation: Both debts must also be
due , demandable, and liquidated at the same time. Total or extinctive — when the old obligation is
completely extinguished.
Ex 1. A owes B P10,000.00 due today.
Partial or modificatory — when the old obligation is
B owes A P10,000.00 due next month.
merely modified.
Compensation cannot take place as the debts are not due
According to the subject:
on the same date. Compensation will only take place if A
still owes B P10,000 on the date e that the obligation of B Real or objective. — when the object (or cause) or
becomes due. If the debt of B is subject to a suspensive principal conditions of the obligation are changed
condition which has not yet happened, there can also be
no compensation Personal or subjective. — when the person of the debtor
is substituted and/or when a third person is subrogated in
Ex 2. A owes B P1,000 the rights of the creditor
B owes A the share of the latter in a business the Mixed. — when the object or principal condition of the
amount of which is still to be ascertained. obligation and the debtor or the creditor or both the
parties, are changed. It is a combination of real and
Compensation will not take place as the debt of B is not
personal novations.
liquidated. If part of B has been liquidated, compensation
will take place with waiting for the rest.
Element of 4 of Compensation: No retention or Kinds of Personal Novation
controversy has been commenced by a third person.
1. Substitution - debtor is substituted, creditor’s
Ex 1. A owes B P10,000.00. consent is required and necessary
B owes A P10,000.00. Expromission(Subtitution) – Third person acts on his own
with creditor’s consent but without the knowledge or
B also owes C P10,000.00.
against the will of the original debtor. Old debtor must be
released from his obligation, otherwise, there is no
expromission.
Payment by the new debtor gives him the right to In this case, C will be subrogated in the rights of B
beneficial reimbursement.
3. When a third person with interest in the obligation
New debtor’s insolvency(Expromission) pays even without the knowledge of the debtor.
If the new debtor is insolvent and failed to comply to the Ex. A and B are joint debtors of C for the amount of
obligation, it won’t revive the old creditor’s obligation as it P1,000.00. Without the knowledge of A, B pays the debt of
was made without the will of old debtor. P1,000.00.
Delegacion(Subtitution) – Creditor accepts third person to In this case, B becomes a creditor of A for P500.00, the
take place of the old debtor at initiative of old debtor. All latter’s share of the debt but not for the remaining
parties must agree including the third person in order for P500.00, the portion of the debt which corresponds to B,
delegacion to commence. which is extinguished by confusion or merger of rights.
New debtor’s insolvency(Delegacion)
GR: old debtor is not liable to the creditor in case of new OTHERS:
debtor’s insolvency
Partial Subrogation - The creditor to whom partial
EXE: (1) Insolvency already exist and of public payment has been made by the new creditor remains a
knowledge(even if it was not known to the old debtor) at creditor to the extent of the balance of the debt.
the time of delegacion.
Material incompatibility - In novation is a concept in
(2) Insolvency already exist and known by the old contract law that refers to the situation when the old and
debtor at the time of delegacion. the new obligations are so different from each other that
they cannot coexist or be performed simultaneously.
The exceptions are intended to prevent fraud on the part
of the old debtor.
End.
Ex 1. D owes C P1,000.00. D proposed to C that X would
substitute him as debtor. C agreed to the proposal. If, at
the time of the delegacion, X 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 X took place after he delegated his debt
It is believed that D is also not liable if C had knowledge
that X was insolvent at the time the debt was delegated to
him as all parties agreed.
2. Subrogation. — when a third person is
subrogated in the rights of the creditor.
There is subrogation if:

1. When a creditor pays another creditor who is

preferred, even without the debtor’s knowledge.
Ex. A owes B P1,000.00 secured by a fi rst mortgage on
the land of A
A also owes C P2,000.00. This debt is unsecured (or
secured by a second mortgage)
Under the law, B, who is a preferred creditor, has
preference to payment with respect to the land as against
C who is merely an ordinary creditor.
If C pays the debt of A to B, C will be subrogated in B’s
right so that he can have the mortgage foreclosed in case
A fails to pay the P1,000.00 debt.

2. When a third person without interest in the

obligation pays with the approval of the debtor
Ex. A owes B P1,000.00
C pays B with the express or implied consent of A