OBLIGATIONS AND

CONTRACTS
EXTINGUISHMENT OF OBLIGATIONS

PART II
 LOSS OF THE THING DUE
ART. 1262. An obligation which consists in the delivery of a
determinate thing shall be extinguished if it should be lost or
destroyed without the fault of the debtor, and before he has
incurred in 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. (1182a)
 WHEN IS A THING CONSIDERED
LOST
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.

WHEN LOSS OF THING WILL EXTINGUISH AN OBLIGATION TO GIVE:

• The obligation is to deliver a specific or determinate thing;

• The loss of the thing occurs without the fault of the debtor;

• The debtor is not guilty of delay.

Remember, a generic thing can be replaced or substituted as provided

in…

ART. 1263. In an obligation to deliver a generic thing, the loss or

destruction of anything of the same kind does not extinguish the
obligation. (n)
 Condonation or Remission of the
Debt
ART. 1270. Condonation or remission is essentially gratuitous
and requires the acceptance by the obligor. It may be made
expressly or impliedly.

One and the other kind shall be subject to the rules which
govern inofficious donations. Express condonation shall,
furthermore, comply with the forms of donation. (1187)
Meaning of condonation or remission.

Condonation or remission is the gratuitous renunciation by the

c r e ditor of h is r igh t a ga i n s t t h e d e b t o r r e s u l t i n g i n t h e
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:

• It must be gratuitous;

• It must be accepted by the obligor;

• The parties must have capacity;

• It must not be inofficious; and

• If made expressly, it must comply with the forms of donation.

Remission must be accepted by debtor.

Condonation or remission is a bilateral act. Article 1270 expressly

requires its acceptance by the debtor.

Renunciation by creditor of his credit.

Can the creditor renounce his credit even against the will of the debtor?
Yes. Such unilateral renunciation is allowed. Article 6 provides that
“Rights may be waived, unless the waiver is contrary to law, public
order, public policy, morals or good customs, or prejudicial to a third
person with a right recognized by law.”
Inofficious Donations

The rules on inofficious donations apply to the

condonation or remission of debts. A person’s
prerogative to make donations is subject to certain
limitations, one of which is that he cannot give by
donation more than what he can give by will.

Otherwise, so much of what is donated which exceeds

what he can give by will is deemed inofficious and the
donation is reducible to the extent of such excess.
ART. 1272. Whenever the private document in which the debt appears
is found in the possession of the debtor, it shall be presumed that the
creditor delivered it voluntarily, unless the contrary is proved. (1189)

• Ordinarily, the document evidencing the debt is in the possession of

the creditor.

• If the document is later found in the hands of the debtor and it is not
known how he came into possession of the same, the presumption is
that it was voluntarily delivered by the creditor. This presumption of
voluntary delivery, in turn, gives rise to the presumption of remission.
EXAMPLE:

D owes C P1,000.00 evidenced by a promissory note. The note, signed

by D, is given to C.

If the promissory note is voluntarily delivered to D, the presumption is

that the debt must have been paid by D.

If it is known that D has not yet paid C, it must be presumed that the
obligation has been remitted by C. (Art. 1271.)

Suppose it is not known how D came into possession of the promissory

note. The presumption is that it was voluntarily delivered by C, unless C
proves the contrary. (Art. 1272.)
ART. 1273. The renunciation of the principal debt shall extinguish the
accessory obligations; but the waiver of the latter shall leave the former
in force. (1190)

Effect of renunciation of principal debt on accessory obligation.

The above provision follows the rule that the accessory follows the
principal. While the accessory obligations cannot exist without the
principal obligation, the latter may exist without the former. (see Art.
1230.)
 CONFUSION OR MERGER OF
RIGHTS
ART. 1275. The obligation is extinguished from the time the characters of
creditor and debtor are merged in the same person. (1192a)

Meaning of 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. (4 Sanchez Roman
421.)

Reason or basis for confusion.

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.
Example:

D owes C P1,000.00 for which D executed a negotiable promissory

note1 in favor of C. C indorsed the 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 indorsed the promissory note to D.

Here, D owes himself. Consequently, his obligation is extinguished by

merger.
 COMPENSATION
ART. 1278. Compensation shall take place when two persons, in their own right, are
creditors and debtors of each other. (1195)

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.)

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.
Legal Compensation

Takes effect by operation of law when all the requisites

mentioned in Art. 1279 are present. It extinguishes
both debts to the concurrent amount even though the
creditors and debtors are not aware of the
compensation. It operates even against the will of the
interested parties or without their consent. Such
compensation takes place ipso jure, its effects arise on
the very day in which all of the requisites concur.
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;

A owes B P10,000.00. B owes A P10,000.00. Compensation will take place because A and B
are principal debtors and creditors of each 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;

A owes B P10,000.00. B owes A an electric range worth P10,000.00.

No compensation will take place.

3. That the two debts be due;

A owes B P10,000.00 due today. B owes A P10,000.00 due next month. No compensation will
take place.

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)
ART. 1289. If a person should have against him several debts which are susceptible of
compensation, the rules on the application of payments shall apply to the order of the
compensation. (1201)

Compensation is similar to payment. If a debtor has various debts which are susceptible of compensation,
he must inform the creditor which of them shall be the object of compensation. In case he fails to do so,
then the compensation shall be applied to the most onerous obligation. (Arts. 1252, 1254.)

EXAMPLE:

A is indebted to B in the amount of:

P1,000.00 without interest due today;

P1,000.00 with interest of 12% due to also today; and

P1,000.00 with interest of 10% due yesterday. B owes A P1,000.00 due today.

For purposes of the application of payment, A is the debtor. He must specify to B which of the three
debts should be compensated. If he fails to inform B, then the latter should apply the compensation to
the second obligation of A, namely, the obligation bearing the 12% interest because it is the most
onerous obligation.
Novation
Meaning of novation.

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.
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)

ART. 1292. In order that an obligation may be extinguished by another

which substitutes the same, it is imperative that it be so declared in
unequivocal terms, or that the old and the new obligations be on every point
incompatible with each other. (1204)

Example: S agreed to construct a house for B on a certain parcel of land.

Subsequently they agreed to construct an apartment on the same parcel of
land. The area of the land is that both house and apartment cannot be
constructed on the same site. There is novation because even in the absence
of an express agreement to that effect the two (2) obligations cannot stand
and are absolutely incompatible with each other.
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. (1205a)

Kinds of personal novation.

Personal novation may be in the form of:

Substitution — when the person of the debtor is substituted (Art.

1291[2].); or

Subrogation — when a third person is subrogated in the rights of the

creditor. (Ibid., [3]; Art. 1300.)
Kinds of Substitution
Article 1293 speaks of substitution which, in turn, may be:

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.

Delegacion or that which takes place when the creditor accepts a third
person to take the place of the debtor at the instance of the latter. In
delegacion, all the parties, the old debtor, the new debtor, and the
creditor must agree.

In either of these two modes of substitution, the consent of the creditor

is an indispensable requirement. (De Cortez vs. Venturanza, supra.)
ART. 1297. If the new obligation is void, the original one shall subsist,
unless the parties intended that the former relation should be
extinguished in any event. (n)

The general rule is that there is no novation if the new obligation is void
and, therefore, the original one shall subsist for the reason that the
second obligation being inexistent, it cannot extinguish or modify the
first.
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 is the substitution of one person in the place of another with

reference to a lawful claim or right, so that he who is substituted succeeds
to the right of the other in relation to a debt or claim, including its
remedies and securities.

SUBROGATION MAY BE EITHER:

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

Legal — when it takes place without agreement but by operation of law.

(Art. 1302.)