Section 4- Confusion or Merger of Rights
- Only up to the share
Article 1275. Concept of Confusion
Confusion- the merger of the characters of
creditor and debtor in one and the same person
by virtue of which the obligation is extinguished.
Requisites:
1. The merger of the characters of creditor
and debtor must be in the same person
2. That it must take place in the person of
either the principal creditor or the principal
debtor
3. That it must be complete and definite
- Doesn’t mean that entire obligation is
extinguished; it is the character of the
debtor and creditor
Kinds:
1. Cause or constitutions- Inter vivos or
mortis causa
2. Extent or effect- Total or partial
May be partial:
1. When the confusion or merger refers only
to a part of the obligation
2. When the obligation is joint
Article 1276. Effect upon Accessory Obligations
Confusion or merger of rights will take place in
the person of either the principal creditor or the
principal debtor:
- Extinguished; principal and accessory
obligation
Confusion or merger takes place in the person of
a subsidiary creditor or debtor (e.g. Guarantor)
- The principal obligation is not
extinguished
Article 1277. Effect upon Collective Obligation
- Doest not extinguish a joint obligation
Effect of Revocation of Confusion
- Revoked by presence of:
1. Causes for rescission
2. Annulment
3. Nullity or inexistence of contract
4. Special cause like redemption
Section 5: Compensation
Article 1278. Concept of Compensation
Compensation- as a mode of extinguishing in
their concurrent amount those obligations of
persons who in their own right are creditors and
debtors of each other
Advantage over payments:
1. Facility of payment because it takes effect
by operation of law
2. Guaranty for the effectivity of credit
Book: distinctions
Kinds of Compensation:
1. Legal
2. Voluntary
3. Judicial
Effect:
1. Total
2. Partial
Article 1279. Requisites of Compensation
Requisites:
1. There must be two parties, who, in their
own right, are principal creditors and
principal debtors of each other
2. Both debts must consist in money, or if the
thing due are fungibles (consumables),
they must be of the same kind and quality
 3. Both debts must be due
4. Both debts must be liquidated and
demadable
5. No rentention or controversy commenced
by a third person
6. Must not be prohibited by law
Requisites (party):
1. They must be creditor-debtor to each
other
2. They must be bound as principals
Article 1280. Right of Guarantor to Set up
Compensation
- The payment of the debt is demanded
from him, may set up compensation, not
only for what such creditor owes him, but
also for what such creditor owes his
principal debtor
Article 1281-1282. Voluntary Compensation
- Compensation may be total or partial
Voluntary Compensation
- Parties may agree upon the compensation
of debts which is not yet due
Example:
A owes B Php 10,000 due on 1/5/2011
B owes A Php 10,000 due on 1/31/2011
- On 1/05, it is the prerogative of B, not A to
opt for voluntary compensation
Article 1283. Judicial Compensation
- In reality, what is set of against the other
party is a counterclaim.
- It must be remembered that a
counterclaim must be pleaded to be
effectual; whereas, a compensation takes
place by mere OPERATION of LAW
Article 1284. Rules in case of Recissible or
Voidable
Debt
- Defective until annulled; thus, they can
still be compensation by each other
Article 1285. Effects of Assignments of Rights
Assignment:
1. Assignment of the credit with the consent
of the debtor
2. Assignment with the knowledge but
without the consent of the debtor
3. Assignment without the consent of the
debtor
Situation 1:
A owes B Php 10,000
B owes A Php 2,000
B assigns his right to C
Situation 2:
A owes B Php 1,000 due Nov. 1
B owes A Php 2,000 due Nov. 10
A owes B Php 1,000 due Nov. 5
A assigns his right to C on Nov. 12. A notified B
but the latter did not give his consent to the
assignment.
B can ask for compensation up to Php 1,000. At
Nov 12, the first two had already become
demandable, thus compensation may happen by
operation of law, because when all the requisites
of compensation are present it can automatically
happen.
Situation 3:
A owes B Php 1,000 Nov 1
B owes A Php 2,000 Nov 10
A owes B Php 1,000 due on Nov 15
A assigned his right to C on November 12 without
the knowledge of B and learned the assignment
only on Nov. 16. How much can C collect from B?
C can’t collect anything from B
Article 1286- 1288. Debts which cannot be
compensated
Kinds of debts or obligations which are not
susceptible for legal compensation:
1. Depositum- purpose is for safekeeping;
not loan
a. Not a bank deposit- because in this
situation what is created is a debtor
creditor relationship
2. Commodatum- a free concession of a
property; borrower and lender relationship
3. Claims for support due by gratuitous title-
support in arrears can be subject to
compensation; what is prohibited is
current and future
4. Obligations arising from criminal offense-
the victim is the only one who can ask for
compensation (not the accused) because
it is imperative
5. Certain obligations in favor of the
government, such as taxes, fees, duties
and other of a similar nature
Because these obligations are based on:
1. Trust and confidence
2. Self Preservation
Article 1289-90. Effect of Compensation
- Several Compensation
o Order of compensation
o Application of payment rule
(REMEMBER!)
 Declaration of debtor
 What is issued in the receipt
of the creditor
 What is more onerous
 If all are equal, pro rata
- All requisites are present= operation of
law; even without the effect and
knowledge of the parties
Accessory Obligations:
- if principal is extinguished, the accessory
will follow; will vary depending if its partial
or total
Section 6: Novation
Article 1291. Concept of Novation
Novation- is the substitution or change of an
obligation by another, resulting in its
extinguishment or modification.
Obligation may be modified by:
1. Changing their object or principal
conditions
2. Substituting another in place of the debtor
3. Subrogating a third person in the rights of
a creditor
Distinctive feature- although it extinguishes the
obligation, it also gives birth to another obligation
Requisites:
1. A previous valid obligation
2. Agreement of the parties to the new
obligation
3. Extinguishment of the old obligation
4. Validity of the new obligation
Broad Concept:
1. Extinctive- when an old obligation is
terminated by the creation of a new
obligation that takes the place of the
former
 a. Changing the object or principal
condition (objective or real)
b. Substituting the person of the
debtor
c. Subrogating a third person in the
rights of the creditor (subjective or
personal)
2. Modificatory- when the old obligation
subsists to the extent it remains
compatible with the amendatory
agreement
Kinds of Novation:
Essence:
1. Objective or real-refers to the change
either in the cause, object or principal
conditions of the obligations
2. Subjective or personal- refers to the
substitution of the person of the debtor or
to the subrogation of a third person in the
rights of the creditor
a. Passive- substitution of the person
of the debtor
b. Active- subrogation in the rights of
the creditor
3. Mixed- combination of objective and
subjective novation
Form or Constitution:
1. Express- declared in unequivocal terms
that the old obligation is extinguished by a
new one which substitutes the same
2. Tacit- when the old and new obligations
new obligations are incompatible with
each other on every point
Extend or Effect:
1. Total- absolute extinguishment
2. Partial- modification
Change of cause- may be a form of novation
Change of principal conditions- not incidental nor
accidental
- Executes another instrument reiterating or
ratifying his obligation to the creditor; ninor
changes in the form of payment;
additional facilities- NO NOVATION
Article 1292. Form of Extinguishment
1. Express- so declared in unequivocal
terms
2. Implied- every point incompatible with
each other
RULE: Novation by presumption has never been
favored
Animus Novandi- intent to substitute a new
obligation for the old must be clearly established
or b their acts are too clear or unequivocal to be
mistaken
Delegation- does not operate a novation; unless
the creditor has expressly declared that he
intends to discharge with the delegating debtor
and during the time of delegating the latter was
not in open failure or insolvency
Express Novation- it can only take place when
the contracting parties disclose that the object in
making the new contract is to extinguish the old
one.
o Signing of a second promissory
note- not novation
Implied Novation- it is imperative that the old and
the new obligations must be incompatible with
each other on every point
1. Object
2. Cause
3. Principal condition
Test of Incompatibility- it to determine whether or
not both of them can stand together ach having
its own independent existence
No implied novation in the following cases:
1. Second contract provides for another
method of paymentb
2. Additional security
3. Postponement of the date of payment
4. Creditor receives a guaranty
5. Accepts payment from a third person who
has agreed to assume the obligation, so
long as there is no agreement that the first
debtor shall be released from
responsibility
6. Where a surety bond is filed
7. Third person who has assumed the
obligation merely becomes a co-debtor or
surety
Implied novation:
1. Change of the parties
2. Amount
3. Date or maturity- only in the reduction or
decrease in the duration of the obligation
Article 1293. Substitution of the debtor
- Must be with the consent of the creditor
Forms:
1. Expromision- substitution with the consent
of the creditor; 1. Substitution with the
consent and knowledge of the debtor or 2.
Substitution without the knowledge or
against the will of the debtor
Requisites:
a. The initiative for the substitution
must emanate from the NEW
debtor
b. Consent of the creditor to the
substitution
2. Delegacion- substitution of debtors is
effected with the consent of the creditor at
the instance of the old debtor with the
concurrence of the new debtor
Requisites:
a. The initiative for the substitution
must emanate from the OLD
debtor
b. Consent of the new debtor
c. Acceptance by the creditor
In both substitution- creditor’s consent is
necessary
Effect of payment of new debtor
- Original debtor shall reimburse to the new
debtor whatever benefits he may have
derived therefrom
Expromision- rules regarding payment of a debt
by a third person
Substitution is with the knowledge and consent
of the original debtor; payment is made by the
new debtor and with or without the knowledge
and consent of such original debtor
- Demand the reimbursement of the entire
amount
- Subrogated in all of the rights of the
creditor
Substitution was effected with the knowledge and
consent of the original debtor;
payment is made without the knowledge and
consent of the original debtor
- Can only demand reimbursement insofar
as the payment was beneficial to the
original debtor
- But he can’t be subrogated in the rights of
the creditor
Payment is made with the knowledge and
consent of the original debtor
- Can still demand reimbursement from the
orginal debtor of the entire amont which
he has paid
 - Subrogated in all of the rights of the
creditor
Delegacion- shall be regulated by the agreement
of the parties; absence of which- rules regarding
payment of a debt by a third person
Payment:
- reimbursement from the orginal debtor the
entire amount
- Compel the creditor to subrogate him in all
of his rights
Article 1294-95. Effect of nonpayment by new
debtor
GEN RULE: novation by substitution of the
person of the debtor whether by expromision or
by delegacion has the effect of releasing the
original debtor from his obligation to the creditor
EXCEPT: if the new debtor becomes insolvent
Expromision: the new debtor’s insolvency or
nonfulfillment of the obligation can never result
in the revival of the original debtor’s liability to the
creditor
(NCC) With the consent- revive the original
debtor’s liability
Delegacion:
1. When the insolvency of the debtor was
already existing and of public knowledge
at the time when the original debtor
delegated his debt
3. when the insolvency was already existing
and known to the debtor
Article 1296. Effect upon Accessory Obligations
- accessory is dependent on the principal
- EXCEPT:
o If there was a stipulation to the
contrary favoring a third person
which may be demanded
separately from the principal
obligation
Article 1297-98. Effect if New and/or Old
Obligation are void.
In order to effect the novation, it is essential that
the obligation must be valid
In old obligation is voidable:
1. Annulment of the obligation may be
claimed only by the debtor
a. If expromision is used- the original
debtor can still raise this defense
2. Ratification of the obligation
Article 1299. Effect if old obligation is conditional
- Both resolutory and suspensive condition-
the new obligation shall be under the
same condition unless otherwise stated
- READ BOOK
Article 1300. Novation by subrogation (3)
- Two forms: legal and conventional
- Legal is not presumed: unless expressly
mentioned in the code
- Conventional: must be clearly established
Article 1301. Conventional Subrogation
- Requires the consent of the original
parties and of the third person
- Agreement is essential
- If the creditor, without the consent of the
debtor, transfers his rights= there is no novation
but mere assignment of rights
Convetional Assignment
Rules Article 1300- Aritcle 1624-27
governing 1304
Necessity of Required Not required
debtor’s
consent
Effect upon Extinguishing Transmitting Effect of Partial Subrogation
Obligation the old; the rights of - Rights with respect to the remainder are
establishing a the creditor not affected by the subrogation
new one without o Therefore, both rights will exist
modifying or o In case of conflict, the real creditor
extinguishing is preferred
the obligation
Effect upon Defects or Not cured
vices vices are
cured
Time of From the Moment of
effectivity moment notification

Article 1302. Legal Subrogation

GENERAL RULE: Legal subrogation is not

presumed

EXCEPTIONS:
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

Article 1303-04. Effect of Subrogation

Total Subrogation
- Transfers all of the right which the original
creditor had against the debtor or against
third persons
- Accessory obligations are not
extinguished
o Rule is absolute in legal
subrogation
o Rule may vary in conventional
subrogation