C.

Application of Payments
Concept:
Application of payments is the designation of the debt to which should be applied the payment made by a debtor
who has various debts of the same kind in favor of one and the same creditor. (Art. 1252, par. 1.)
The requisites are:
(1) There must be one debtor and one creditor;
(2) There must be two or more debts;
(3) The debts must be of the same kind;
(4) The debts to which payment made by the debtor has been applied must be due; and
(5) The payment made must not be sufficient to cover all the debts.
Rules on application of payments.
They are as follows:
(1) The debtor has the first choice; he must indicate at the time of making payment, and not afterwards, which
particular debt is being paid. (see Powell vs. Phil. National Bank, 54 Phil. 54 [1929].) 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.
(2) The right to make the application once exercised is irrevocable unless the creditor consents to the change.
(3) It is clear from the use of the word “may’’ rather than the word “shall’’ in Article 122 that the debtor’s right to
apply payment is not mandatory but merely directory. If the debtor does not apply payment, the creditor has the
subsidiary right to make the designation by specifying in the receipt which debt is being paid;
(4) If the creditor has not also made the application, or if the application is not valid (par. 2.), the debt, which is
most onerous to the debtor among those due, shall be deemed to have been satisfi ed (Art 1254, par. 1.);
(5) If the debts due are of the same nature and burden, the payment shall be applied to all of them
proportionately. (Ibid., par. 2.); and
(6) If neither party has exercised its option and there is disagreement as to debts to which payment must be
applied, the court will apply the payment according to the justice and equity of the case, taking
into consideration all its circumstances. (Premiere Development Bank vs. Central Surety & Insurance Co., Inc., 579
SCRA 359 [2009].) The rules in Articles 1252 to 1254 apply to a person owing several
debts of the same kind to a single creditor. They are not applicable to a person whose obligation as a mere surety
is both contingent and singular.

d. Payment by Cession
Concept:
Payment by cession is another special form of payment. It is the assignment or abandonment of all the properties
of the debtor for the benefit of his creditors in order that the latter may sell the same and apply the proceeds
thereof to the satisfaction of their credits.
Requisites of payment by cession.
They are:
(1) There must be two or more creditors;
(2) The debtor must be (partially) insolvent;
(3) The assignment must involve all the properties of the debtor; and
(4) The cession must be accepted by the creditors.
Effect of payment by cession.
Unless there is a stipulation to the contrary, the assignment does not make the creditors the owners of the
property of the debtor and the debtor is released from his obligation only up to the net proceeds of the sale of the
property assigned. (Art. 1255.) In other words, the debtor is still liable if there is a balance.

e. Dation in Payment
Concept:
It is that mode of extinguishing an obligation whereby the debtor alienates in favor of the creditor, property for the
satisfaction of monetary debt.

Dation in payment and cession distinguished.

Dation in payment or dacion en pago is a special form of payment whereby another thing is alienated by the
debtor to the creditor who accepts it as equivalent of payment of an existing debt in money. There is no dation if
the transfer of property is by way of security only, and not by way of satisfying the debt.
The differences are:
(1) In dation (see Art. 1245.), there is usually only one creditor, while in cession, there are several creditors;
(2) Dation does not presuppose the insolvency of the debtor or a situation of financial difficulties, while in cession,
the debtor is insolvent at the time of assignment;
(3) Dation does not involve all the property of the debtor, while cession extends to all the property of the debtor
subject to execution;
(4) In 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 and apply the proceeds to their credits pro rata; and
(5) Dation is really an act of novation (Art. 1291[1].), while cession is not an act of novation.
Both are substitute forms of payment or performance. They are governed by the law on sales.

f. Tender of Payment and Consignation

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 be delivered at the time of the offer. It is an
act preparatory to consignation, which is the principal, and from which are derived the immediate consequences
which the debtor desires or seeks to obtain.
Requirements for valid tender of payment.
Tender of payment is the definite act of the debtor of offering the creditor what is due the latter. There must be a
fusion of intent, ability and capability to make good such offer, which must be absolute and
must cover the amount due.
(1) Tender of payment must comply with the rules on payment.
(2) It must be unconditional and for the whole amount.
(3) It must be actually made.
Consignation is the act of depositing the thing or amount due with the proper court when the creditor does not
desire, or refuses to accept payment, or cannot receive it, after complying with the formalities required by law. It is
always judicial and it generally requires a prior tender of payment which is by its very nature extrajudicial. (Art.
1256, par. 1.)
Nature of and rationale for consignation
(1) A facultative remedy.
(2) Avoidance of greater liability.
Requisites of a valid consignation.
In order that the debtor may be released from his obligation by the consignation of the thing or sum due,the
following requisites must be observed:
(1) existence of a valid debt which is due (Art. 1256, par. 1.);
(2) tender of payment by the debtor and refusal without justifiable reason by the creditor to accept it (Ibid.);
(3) previous notice of consignation to persons interested in the fulfillment of the obligation (Art. 1257, par. 1.);
(4) consignation of the thing or sum due (Art. 1258, par. 1.); and
(5) subsequent notice of consignation made to the interested parties. (Ibid., par. 2; see Gardner vs. Court of
Appeals, 27 SCRA 399[1977].)
The absence of any of the requisites is enough ground to render consignation ineffective. Compliance with the
requirements is mandatory. The law speaks of “thing.” It makes no distinction between
real and personal property.
When tender and refusal not required(Art.1256, par. 2)
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;
(4) When two or more persons claim the same right to collect;
(5) When the title of the obligation has been lost. (1176a)
Two notice requirement (Art.1257, par.1, Art.1258, par.2)
>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 having been made, the interested parties shall also be notified thereof.
Effects(Art. 1260, par.1)
Once the consignation has been duly made, the debtor may ask the judge to order the cancellation of the
obligation.
Withdrawal by debtor before acceptance by creditor or approval of court (Art.1260, par2)
>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.
Withdrawal by debtor after proper consignation (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.
Effect of withdrawal with authority of creditor.
Since consignation is for the benefit of the creditor, he may authorize the debtor to withdraw the deposit after he
has accepted the same or after the court has issued an order cancelling the obligation.
As far as the debtor and the creditor are concerned, their relations will remain as they were before acceptance or
cancellation. However, the creditor shall lose every preference which he may have over the thing, and the co-
debtors (referring to solidary debtors), guarantors, and sureties shall be released.
The solidary debtors are released only from their solidary liability, but not from their shares of the obligation, since
unlike guarantors and sureties, they are also principal debtors.
Creditor Generally to Bear Expenses of Consignation
Reason why the creditor pays the expenses of the consignation if properly made: Clearly, this consignation is due to
the creditor’s fault, for had he accepted, there would not have been any need for the consignation. If not properly
made, the consignation expenses are, of course, chargeable to the debtor.
Loss or Impossibility
Loss of the thing due
Concept(Art. 1189, par. 2)
It is understood that the 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 be recovered.1 (Art. 1189, par. 2.)
Loss of a determinate thing under Article 1262 (par. 1.) is the equivalent of impossibility of performance in
obligations to do referred to in Article 1266. But “loss of the thing due,” as used in Article 1231(1) and the above
section, extends to both obligations to give and obligations to do.
Requisites (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 delay.
>When by law or stipulation, the obligor is liable even for fortuitous events, the 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.
Presumption (Art. 1266,1267)
>The debtor in obligations to do shall also be released when the prestation becomes legally or physically
impossible without the fault of the obligor.
>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.
Effects
In an obligation to give specific thing (Art. 1262, 1268)
Loss of a determinate thing
As a general rule, the loss of a determinate thing extinguishes the obligation. The following are the
exemptions:
 When the loss is due to the fault of the debtor. Loss of the thing while in the possession of the debtor
shall be presumed to be due to his fault, unless proved otherwise. This presumption does not apply in
case of earthquake, flood, storm or other natural calamity.(art. 1265)
 When the debtor incurred in delay.
  When so provided by law, (art 1262) as when debtor has promised to deliver the same thing to two or
more persons who do not have the same interest. (art 1165)
 When it is stipulated by the parties.
 When the nature of the obligation requires the assumption of risk.
 When the debt proceeds from a criminal offense(unless the person who should receive it refuses to
accept it without just cause.(art 1268)
In an obligation to give generic thing (art 1263)
Loss of generic thing
The loss or destruction of anything of the same kind does not extinguish the obligation., because a generic
thing does not really perish (genus nunquam perit).
EXEMPTION: In the case of a “ delimited generic thing,” such as “100 cavans of rice from my harvest this year”
when such harvest is completely destroyed.
Loss in personal obligation(obligation to do)
 When the prestation becomes legally or physically impossible without the fault of the debtor, the
obligation is extinguished.(art 1266)
 When the service has become so difficult as to be manifestly beyond the contemplation of the
parties, the obligor may also be released in whole or in part. (art 1267)
In case of Partial loss
The court shall determine whether under the circumstances, the partial loss of the object is so important
as to extinguish the obligation. (art 1264)
Impossibility of Performance
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. 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.
Kinds of impossibility.
(1) 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. The law does not make any distinction as to whether or not the obligation can still be
performed by others. However, if the impossibility is due to the fault or negligence of the obligor, he shall be liable
for damages.
(2) Legal impossibility occurs when the obligation cannot be performed because it is rendered impossible by
provision of law, although physically it may be possible of performance.
Natural impossibility and impossibility in fact distinguished.
In considering the effect of impossibility of performance of a contract on the rights of the parties, it is necessary to
keep in mind the distinction between:
(1) Natural impossibility, which must consist in the nature of the thing to be done and not in the inability of the
party to do so; it must appear that the thing to be done cannot by any means be accomplished;
and
(2) Impossibility in fact, in the absence of inherent impossibility in the nature of the thing stipulated to be
performed, which is only improbable or out of the power of the obligor.
The first class of impossibility goes to the consideration and renders the contract void. The second does not.
Effect of difficulty of performance.
The general rule is that impossibility of performance releases the obligor. (Art. 1266.)
Article 1267 is another exception to the obligatory force of a valid and enforceable contract.
When the performance of the service has become so difficult as to be manifestly beyond the contemplation of
both parties, the court is authorized to release the obligor in whole or in part. It would be doing violence to the
intention of the parties to hold the obligor still responsible. There is an element of the unforeseen or fortuitous
event in the situation covered by Article 1267. Note that under Article 1267, the remedy of the obligor is not
annulment but to be released from his obligation, in whole or in part. Article 1267 does not distinguish between an
“active’’ personal obligation to do and a “passive’’ personal obligation not to do. (see Arts. 1167, 1168.) Despite
the use of the term “service,’’ Article 1267 also applies to a real obligation to give or deliver a thing. (see Arts.
1163, 1165.) The term “service’’ should be understood as referring to the performance of the obligation. (Naga
Telephone Co., Inc. vs. Court of Appeals, 230 SCRA 351 [1994].) In a contract of lease, the lessor engages to
perform both real and personal obligations. (see Art. 1654.)
Article 1266 is applicable only to obligations to do.
In contractual obligations to pay money, Article 1250 applies in case there is an extraordinary increase or decrease
in the value of currency stipulated.
Condonation or Remission (art1270)
Condonation or remission is the gratuitous renunciation by the creditor of his right against the debtor resulting in
the extinguishment of the latter’s obligation in its entirely or in that part of the same to which the renunciation
refers. It is thus a form of donation.
Requisites of condonation or remission.
The requisites are the following:
(1) It must be gratuitous;
(2) It must be accepted by the obligor;
(3) The parties must have capacity;
(4) It must not be inoffi cious; and
(5) If made expressly, it must comply with the forms of donation.
It is also clear that remission, properly speaking, presupposes that the obligation is and continues to be,
demandable at the time of the remission.
Kinds of remission.
(1) As to its extent:
(a) Complete. — when it covers the entire obligation;(both principal and accessories)
(b) Partial. — when it does not cover the entire obligation.(only accessory is remitted)
(2) As to its form:
(a) Express. — when it is made either verbally or in writing;It must, to be valid, comply with the formalities
of donation as follows:
 When the remission involves an immovable property, the remission and the acceptance must be
in a public instrument. The public document must specify the property remitted and the value of
the charges that the debtor(done)must satisfy.
 When the remission involves a movable/personal property.

(b) Implied. — when it can only be inferred from conduct of the parties, such as when the creditor
voluntarily delivers the private document evidencing the credit to the debtor.
(3) As to its date of effectivity:
(a) Inter vivos. — when it will take effect during the lifetime of the donor; or
(b) Mortis causa. — when it will become effective upon the death of the donor. It must comply with the
formalities of a will.
Presumptions (Art 1271-1274)
Presumption in case document of indebtedness voluntarily delivered by creditor.
Presumption of implied remission. — Article 1271 gives an example of implied or tacit remission. In order that the
presumption established by this article may be applicable, it is necessary that the delivery of the private document
be a voluntary act of the creditor. If the debt is not yet paid, the creditor would need 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.
Contrary evidence. — However, evidence is admissible to show otherwise, as when it was delivered only for
examination. In a case, the court ruled that there was sufficient evidence that when the plaintiff sent the receipt
signed by him to the defendant for the purpose of collecting his attorney’s fees, it was not his intention that the
document should remain in the possession of the defendant if the
latter did not forthwith pay the amount specified therein.
Extent of remission. — If the obligation is joint, the presumption of remission, when applicable, pertains only to the
share of the debtor who is in possession of the document; if solidary, to the total obligation.
Presumption applicable only to private document. — Article 1271 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 copy of the
same, being a public record. The presumptions in Articles 1271, 1272, and 1274 are only prima facie.
Presumption when private document evidencing debt is found in the possession of the debtor
 When the private document evidencing the debt is found in the possession of the debtor, the same is
presumed to have been delivered voluntary by the creditor to the debtor(so as to remit the obligation) unless the
contrary is proved. (Art 1272) Thus, there is no such presumption if the document is a public document which is
easily available being a public record.
Presumption when 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
When the thing pledged after its delivery to the creditor is found in the possession of the debtor, the
accessory obligation of pledge is presumed remitted but not the principal obligation.
Effects
In general (art 1275)
Art. 1275. The obligation is extinguished from the time the characters of creditor and debtor are merged in the
same person.
Effect of remission/renunciation of principal obligation on the accessory obligation and vice-versa
1. The remission of the principal debt extinguishes the accessory obligation (based on the accessory follows
the principal rule).
2. The remission of the accessory obligation does not carry with that of the principal debt.(art 1273)
Effect of inofficious remission.
While a person may make donations, no one can give more than that which he can give by will, otherwise, the
excess shall be inofficious and shall be reduced by the court accordingly.
As a rule, testamentary dispositions which impair the legitime shall be reduced on petition of the heirs (see Art.
887.) insofar as they are inoffi cious or excessive. Legitime is that part of the testator’s property which he cannot
dispose of because the law has reserved it for certain heirs (like the children with respect to their parents) who are,
therefore, called compulsory heirs. (Art. 886.)
Governing Rule (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 kinds shall be subject to the rules which govern inofficious
donations. Express condonation shall, furthermore, comply with the forms of donation.
Renunciation of Principal or accessory Obligations
Art. 1273. The renunciation of the principal debt shall extinguish the accessory obligation; but the waiver of the
latter shall leave the former in force.
Renunciation of Principal Extinguishes Accessory, But Not Vice-Versa
This follows the rule of “accessory follows the principal.”
Example
A remission of the penalty does not remit the principal obligation, but if the principal debt is condoned, the penalty
is also condoned.
Confusion or Merger
Confusion or merger is the meeting in one person of the qualities of creditor and debtor with respect to the same
obligation.
Reason or basis for confusion.
(1) The law treats confusion or merger as a mode 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 may have been created
are deemed realized.
Requisites of confusion.
For a valid confusion or merger to the place, it is necessary that:
(1) It must take place between the principal debtor and creditor; and
(2) It must be complete and definite.
Effect of merger when there is a guarantor
1. Merger which take place in the principal debtor or creditor benefits the guarantors. Here, both the
principal obligation and the guaranty are wxtinguished.
2. Merger which takes place in the person of the guarantor does not extinguish the obligation. Here, only the
guaranty is extinguished.
Merger in a joint obligation
 Merger extinguishes only the share of the joint debtor or creditor in whom the character of debtor and
creditor concur.
Merger I a solidary obligation
Merger in one of the solidary debtors or solidary creditors extinguishes the whole obligation. The solidary
debtor in whom the characters of debtor and creditor concur can demand reimbursement from his co-debtors. In
the case of the share corresponding to each of them.
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.
Merger in Joint Obligations
Example: A and B jointly owe C P1,000,000. If C assigns the entire credit to A, A’s share is extinguished, but B’s
share remains. In other words, B would still owe A the sum of P500,000. In a joint obligation, the debts are distinct
and separate from each other.
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.
Compensation
ART. 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each
other.
Concept:
Compensation is the extinguishment to the concurrent amount of the debts of two persons who, in their own right,
are reciprocally principal debtors and creditors of each other. (Arts. 1278, 1290.)
It involves the simultaneous balancing of two obligations in order to totally extinguish them if they are of the same
amount or to the extent in which the amount of one is covered by that of the other, if of different amounts.
EXAMPLE:
A owes B the amount of P1,000.00.
B owes A the amount of P700.00.
Both debts are due and payable today. Here compensation takes place partially, that is, to the 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, there
is total compensation. (Art. 1281.) The two debts are extinguished without actual transfer of money between the
parties

Compensation and confusion distinguished.

The differences are:
(1) In confusion, there is only one person who is a creditor and debtor of himself, while in compensation, there are
two persons involved, each of whom is a debtor and a creditor of the other;
(2) In confusion, there is but one obligation, while in compensation, there are two obligations; and
(3) In confusion, there is impossibility of payment, while in compensation, there is indirect payment.
There may be compensation in joint and solidary obligations.
Kinds of compensation.
(1) By its effect or extent:
(a) Total. — when both obligations are of the same amount
and are entirely extinguished (Art. 1281.); or
(b) Partial. — when the two obligations are of different amounts and a balance remains. (Ibid.) The
extinctive effect of compensation will be partial only as regards the larger debt.
(2) By its cause or origin:
(a) Legal. — when it takes place by operation of law when all the requisites are present even without the
knowledge of the parties (Arts. 1279, 1290.);
(b) Conventional or voluntary. — when it takes place by agreement of the parties (Art. 1282.);
(c) Judicial. — when it takes place by order from a court in a litigation. (Art. 1283.) Strictly speaking,
judicial compensation is merely a form of legal or voluntary compensation when declared by the courts by
virtue of an action by one of the parties, who refuses to admit it, and by the defense of the other who
invokes it (8 Manresa 403.); or
(d) Facultative. — when it can be set up only by one of the parties. (see Arts. 1287, par. 1; 1288.)
Legal Compensation
Legal Compensation or Compensation by Operation of Law
The requisites enumerated under Art. 1279 are those for LEGAL compensation; voluntary compensation in general
requires no requisite except that the agreement be voluntarily and validly entered into.
ART. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the
other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and
also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor. (1196)
Requisites of legal compensation.
Article 1270 enumerates the requirements or requisites for legal compensation. Absent any showing that all of
these requisites are present, compensation may not take place.
While compensation requires the confluence in the parties of the characters of mutual debtors and creditors, their
rights as such creditors and their obligations as such debtors, need not spring from one and the same contract or
transaction.
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.
Effects(art 1289,1290)

When compensation is not allowed (art 1287-1288)

Instances when legal compensation 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 of returning the same. Article 1287 uses
the word depositum instead of “deposit” which is used for an ordinary bank deposit. A bank deposit is not a
depositum as defi ned above. It is really a loan which creates the relationship of debtor and creditor. 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 depositor has every right to set-off his money deposit with a bank against the loans he
had obtained from said bank.
(2) Where one of the debts arises from a commodatum. — Commodatum is a gratuitous contract whereby one of
the parties delivers to another something not consumable so that the latter may use the same for a certain time
and return it.
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 and transportation, in keeping with the financial capacity of the family.
(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 be
improper and inadvisable because the satisfaction of such obligation is imperative.”
Compensation when debts payable at different place (art 1268)
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 pace of payment.
Compensation by Operation of Law
(a) This applies to compensation by operation of law.
(b) “Indemnity for expenses of transportation” (this applies to transportation of the goods or of the object).
(c) “Indemnity for expenses of exchange” (this refers to monetary exchange, in case the debts are money debts).
Compensation when one or both debts are rescissible or voidable (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.
Prevention of Unfairness
To avoid unfairness if rescission or annulment is later on decreed by the court, it is as if NO compensation ever
took place. The decree thus acts retroactively.
Effects of assignment on compensation of debts
 1. When the assignment was with the debtors consent, he cannot set up against the assignee the
compensation that would pertain to him against the assignor unless reserved his right to the
compensation. (art 1285, par. 1)
2. If the debtor was notified of the assignment but he did not give his consent thereto, the debtor may set
up compensation of debts maturing before the assignment but not of subsequent ones. (art. 1285, par 2)
3. If the assignment is without the knowledge of the debtor, he can set up compensation of all debts
maturing before the time he obtain knowledge of the assignment. (art 1285, par 3)

NOVATION (art 1291)

ART. 1291. Obligations may be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor. (1203)
Novation is the total or partial extinction of an obligation through the creation of a new one which substitutes it. It
is the substitution or change of an obligation by another, which extinguishes or modifies the first, either by
changing its object or principal conditions, by or substituting another in place of the debtor, or by subrogating a
third person in the rights of the creditor.
Dual function or purpose of novation.
Novation is a contract containing two stipulations: one to extinguish or modify an existing obligation, and the other
to substitute a new one in its place. Unlike other modes of extinction of obligation, novation is a juridical act with a
dual function. It does not operate as an absolute extinction in the sense that it ends with the extinguishment of an
obligation but only as a relative extinction because it creates a new one in place of the old which is thus only
“modified.” (Art. 1291.)
(1) The novation is extinctive when an old obligation is terminated by the creation of a new obligation that takes
the place of the former because of the total incompatibility between the two obligations.
An extinctive novation would thus have the twin effects of first, extinguishing an existing obligation and second,
creating a new one in its stead. It does not necessarily imply that the new agreement should be complete in itself.
Certain terms and conditions may be carried, expressly or by implication, over to the new obligation.
(2) Where the change is not extinctive but is merely modificatory, i.e., incidental to the main obligation (e.g.,
change in interest rates or an extension of time to pay), the new agreement will not have the effect of
extinguishing the first but would merely supplement it or supplant some but not all of its provisions. In other
words, the old obligation subsists to the extent it remains compatible with the amendatory agreement. Whether
the effect is extinctive or merely modifi catory, is dependent on the nature of the change and the intention of the
parties. In either case, novation is made as provided in Article 1291.
Kinds of novation.
(1) According to origin:
(a) Legal. — that which takes place by operation of law (Arts. 1300, 1302; see Art. 1224.); or
(b) Conventional. — that which takes place by agreement of the parties. (Arts. 1300, 1301.)
(2) According to how it is constituted:
(a) Express. — when it is so declared in unequivocal terms (Art. 1292.); or
(b) Implied. — when the old and the new obligations are essentially incompatible with each other. (Ibid.)
(3) According to extent or effect:
(a) Total or extinctive. — when the old obligation is completely extinguished; or
(b) Partial or modificatory. — when the old obligation is merely modified, i.e., the change is merely
incidental to the main obligation.
(4) According to the subject:
(a) Real or objective. — when the object (or cause) or principal conditions of the obligation are changed
(Art. 1291[1].);
(b) Personal or subjective. — when the person of the debtor is substituted and/or when a third person is
subrogated in the rights of the creditor (Ibid., [2, 3].); or
(c) Mixed. — when the object or principal condition of the obligation and the debtor or the creditor or
both the parties, are changed. It is a combination of real and personal novations.
Requisites of novation.
In novation, there are four (4) essential requisites, namely:
(1) The existence of a previous valid obligation;
(2) The intention or agreement and capacity of the parties to extinguish or modify the obligation; except in the
following:
 When the person of the debtor is changed which can be made even if it is against the will of the
debtor,or
 When another person is subrogated in the place of the creditor;
o When a creditor pays another creditor who is preferred, even without the debtors
knowledge;
o 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 latters
share.
(3) The extinguishment or modifi cation of the obligation; and
(4) The creation or birth of a valid new obligation.
Effect of Novation on accessory obligation
When the principal obligation is extinguished in consequence of a novation, accessory obligations shall
also be extinguished, except in the following cases:
 When the accessory obligation was established for the benefit of third persons who did not give their
consent.(art 1296)
 When there was a stipulation that the accessory obligation will subsist notwithstanding the novation.
 When the novation is one where a third person is subrogated in the rights of creditor.
Effect if new obligation is void (art 1297)
If the new obligation is void, the novation is void. In such a case, the original one shall subsist, unless the
parties intended that the former relation will be extinguished in any event. (art 1297)
Effect if original obligation is void
The novation is void if the original obligation is void. (art 1298) If the original obligation is void, there is no
obligation to extinguish since its non-existent.
Effect if the original obligation is voidable
The novation is valid provided that annulment may be claimed only by the debtor or when ratification
extinguishes acts which are voidable. (art 1298) The novation here cures whatever defects present in the original
obligation.
Effect if original obligation is subject to a suspensive or resolutory conditions
The new obligation shall be subject to the same condition unless otherwise stipulated by the parties. (art
1299)
Objective Novation
Objective Novation takes place when a new performance is substituted for that previously owed, or a new cause is
substituted for that of the original obligation.

Subjective Novation
Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be made even
without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by
the new debtor gives him the rights mentioned in Articles 1236 and 1237.
Personal or Subjective Novation
There are two kinds of personal or subjective novation:
(a) change of the debtor (passive)
(b) change of the creditor (active)
A substitution of debtor without the consent of the creditor is binding upon the parties to the substitution but not
on the creditor.
Substitution of Debtor
Art. 1293 speaks of passive subjective novation (substitution of the debtor), which may be in the form of:
(a) expromision (where the initiative comes from a third person). (Art. 1294, Civil Code).
(b) delegacion (where the initiative comes from the debtor, for it is he who delegates another to pay the debt, and
thus, he excuses himself. Here the three parties concerned — the old debtor, the new debtor, and the creditor —
must agree.
Expromision or that which takes place when a third person of his own initiative and without the knowledge or
against the will of the original debtor assumes the latter’s obligation with the consent of the creditor. (8 Manresa
436; Arts. 1293-1294.) It logically requires the consent of the third person and the creditor. It is essential that the
old debtor be released from his obligation; otherwise, there is no expromision;
Requisites for Expromision
(a) The initiative must come from a third person (who will be the new debtor).
(b) The new debtor and the creditor must CONSENT. (Garcia v. Khu Yek Chiong, 38 O.G. No. 926).
(c) The old debtor must be excused or released from his obligation.
[NOTE: The old debtor’s consent or knowledge is not required. (Art. 1293, Civil Code).]
[NOTE: The mere written statement of a widow that she hoped to pay part of her husband’s bank debt does not
result in expromision.
Effect of Insolvency or Non-Fulfi llment by New Debtor in Expromision
(a) This refers to empromision.
(b) Reason why the old debtor will not be responsible for the new debtor’s INSOLVENCY or NON-FULFILLMENT: The
expromision was brought about without his initiative

Delegacion
(a) This is defined as a method of novation caused by the replacement of the old debtor by a new debtor, who (the
old debtor) has proposed him to the creditor, and which replacement has been agreed to by said creditor and by
said new debtor.
(b) Note that here the delegacion or initiative comes from the old debtor himself.
(c) As in the case of expromision, the old debtor must be released from the obligation; otherwise, there is no valid
delegacion.
The Parties in Delegacion
(a) The delegante — the original debtor
(b) The delegatario — the creditor
(c) The delegado — the new debtor
Requisites for Delegacion
(a) The initiative comes from the old debtor.
(b) All the parties concerned must consent or agree. (Garcia v. Khu Yek Chiong, 65 Phil. 466 and Adiarte v. Court of
Appeals, et al., 92 Phil. 758.)
[NOTE: The consent of the creditor:
1) may be given in any form
2) may be express, or may be implied from his acts but not from his mere acceptance of payment by a third party,
for there is no true transfer of the debt here
3) may be before or after the new debtor has given his consent 4) may be conditional, but the condition has to be
fulfilled; otherwise, there is no valid delegacion.
Effect of Insolvency by New Debtor in Delegacion
(a) This refers to delegacion.
(b) Note that the Article deals only with insolvency, and not with other causes of non-fulfillment. (In said other
causes, the old debtor is not liable.)
Requisites to Hold Old Debtor Liable
For the old debtor to be liable if the new debtor is insolvent, it is required that either of the following must be
present:
(a) The insolvency was already existing and of PUBLIC KNOWLEDGE at the time of delegation;
(b) OR the insolvency was already existing and KNOWN TO THE DEBTOR at the time of delegation.
(Note that if the insolvency occurred only AFTER the delegation, the old debtor is not liable.)
ART. 1295. The insolvency of the new debtor, who has been proposed by the original debtor and accepted by the
creditor, shall not revive the action of the latter against the original obligor, except when said insolvency was
already existing and of public knowledge, or known to the debtor, when he delegated his debt. (1206a)

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 it may take effect. (1209a)
Subrogation’ Defined
Subrogation (extinctive subjective novation by change of the creditor) is the transfer to a third person of all the
rights appertaining to the creditor, including the right to proceed against guarantors, or possessors of mortgages,
subject to any legal provision or any modifi cation that may be agreed upon.
Kinds of subrogation.
Subrogation may be either:
(1) Conventional. — when it takes place by express agreement of the original parties (the debtor and the original
creditor) and the third person (the new creditor) (Art. 1301.); or
(2) Legal. — when it takes place without agreement but by operation of law. (Art. 1302.)
Conventional subrogation must be clearly established in order that it may take place. (Arts. 1292, 1300.) Legal
subrogation is not presumed except in the cases expressly provided by law. (Art. 1302.)
Kinds of Subrogation(PARAS)
(a) From the viewpoint of cause or origin:
1) conventional or voluntary subrogation (this requires an agreement and the consent of the original
parties and of the creditor) (Art. 1301)
2) legal subrogation (this takes place by operation of law)
(b) From the viewpoint of extent:
1) total subrogation
2) partial subrogation (here, there would now be two or more creditors)
Consent of all parties required in conventional subrogation.
In conventional subrogation, the consent of all the parties is an essential requirement.
(1) the debtor. — because he becomes liable under the new obligation to a new creditor.
(2) the old or original creditor. — because his right against the debtor is extinguished.
(3) the new creditor. — because he may dislike or distrust the debtor.
Conventional subrogation and assignment of credit distinguished.
Articles 1300 and 1301 do not exclude the power of the creditor (assignor) to transmit his rights without the
consent of the debtor to another (assignee) who would then have the right to proceed against the debtor. In this
case, there is assignment of credit (see Arts. 1624- 1635.) but no subrogation.
Assignment of credit has been defined as the process of transferring the right of the assignor to the assignee who
would then have the right to proceed against the debtor. The assignment may be done gratuitously or onerously,
in which case, it has an effect similar to that of a sale.
(1) In conventional subrogation, a credit is extinguished and another appears, which the new creditor claims as his
own, while in assignment of credit, there is a transfer of same credit which belonged to another and which, upon
being transferred, is not extinguished.
(2) In conventional subrogation, the consent of the debtor is required so that it may fully produce legal effects,
while in assignment of credit, it is not, his knowledge thereof affecting only the validity of the payment he might
make. (see Art. 1626.) What the law requires in an assignment of credit is merely notice to the debtor as the
assignment takes effect only from the time he has knowledge thereof.
(3) The effects of conventional subrogation begin from the time of novation itself, that is, from the moment all the
parties have given their consent, while in assignment of credit, the effects with respect to the debtor begin from
the date of notification. (see Art. 1626.)
(4) In conventional subrogation, the nullity or defects of the previous obligation may be cured by the novation,
while in assignment of credit, the nullity or defects of the obligation are not remedied,
because only the correlative right of the obligation is transmitted.
The rules governing conventional subrogation are, of course, different from those governing assignment of credit.

Effect of legal subrogation.

The effect of legal subrogation is to transfer to the new creditor the credit and all the rights and actions that could
have been exercised by the former creditor either against the debtor or against third persons, be they guarantors3
or mortgagors. Simply stated, except only for the change in the person of the creditor, the obligation subsists in all
respects as before the novation. (see Art. 1237.)
The effect of legal subrogation as provided in Article 1303 may not be modified by agreement. The effects of
conventional subrogation are subject to the stipulation of the parties.
There are distinctions between the right to be subrogated and the right to reimbursement.
Legal Subrogation Not Presumed
Legal subrogation is not presumed, except in the case expressly mentioned in the law. (See Art. 1302;
Conventional Subrogation Must Be Established
Conventional subrogation must be clearly established, otherwise, it is as if no subrogation has taken place.
Distinctions Between Conventional Subrogation and Assignment of Credit (See 8 Manresa, p. 448)
CONVENTIONAL SUBROGATION
(a) extinguishes the obligation, and creates a new one
(b) this requires the debtor’s consent
(c) the defect in the credit or right is not cured simply by assigning the same (Here, the debtor generally still has
the right to present against the new creditor any defense available as against old creditor.)
ASSIGNMENT OF CREDIT
(a) here, there is mere transfer of the SAME right or credit (the transfer did not extinguish the credit)
(b) this does not require the debtor’s consent (mere notification to him is sufficient) Art. 1301
(c) the defect of the old obligation may be cured in such a way that the new obligation becomes entirely valid
(Thus here, there is no right to present against the new creditor any defense
which he, the debtor, could have set up against the old creditor.)
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. (1213)
Effect of partial subrogation.
The creditor to whom partial payment has been made 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 above article to
recover the remainder as against the new creditor.
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. (1210a