SECTION 4 – Confusion or Merger of Rights
shall extinguish the entire Compensation
CONFUSION (Merger) – the meeting in one (1) person
of the qualities of creditor and debtor with respect to
the same obligation.
REQUISITES:
 It must take place between the principal debt
and creditor; and
 It must be complete
EFFECTS OF CONFUSION (MERGER)
ARTICLE 1275 The obligation is
extinguished form the time
the characters of creditor
and debtor are merged in the
same person.
ARTICLE 1276
(1) Principal debtor (1) Obligation is extinguished
or creditor including the accessory
obligation in accordance with
the principle that the
accessory follows the
principal.
(2) Guarantor (2) The guaranty is
extinguished while the
principal obligation leaves in
force.
ARTICLE 1277
(1) Joint obligation (1) The confusion will
extinguish only the share of
corresponding to the creditor
or debtor in whom the two
characters concur.
(2) Solidary (2) The merger in the person
obligation of one of the solidary debtors Kinds of Meaning
obligation because it is also a As to Effect or
merger in the other. Extent:
SECTION 5 – Compensation (a) Total (a) When both obligations are of
the same amount and are entirely
COMPENSATION – offsetting of two obligations which extinguished.
are reciprocally extinguished if they are of the same (b) Partial (b) When the two (2) obligations
value, or extinguished to the concurrent amount if of
are of different amounts and a
balance remains. The extinctive
different values.
effect of compensation will be
General Rule: The principal debtor can set up against partial only as regards the larger
debt.
his creditor what the latter owes him.
As to Cause or
Exception: The guarantor is given the right to set up Origin:
(a) Legal (a) When it takes place by
compensation even though he is only subsidiary
operation of law even without the
because the extinguishment of the principal obligation knowledge of the parties.
as a consequence of compensation carries with it the (b) Voluntary (b) When it takes place by
accessory obligations (e.g. guaranty). agreement of the parties.
(c) Judicial (c) When it takes place by order
Object: prevention of unnecessary litigations and from a court in litigation.
payments. (d) Facultative (d) When it can be set up only by
one of the parties.
As to: Confusion Compensation
Number Only one There two persons
of party person who is involved, each of REQUISITES OF LEGAL COMPENSATION:
a creditor whom is a debtor and a
and debtor of creditor of the other  The parties are principal creditors and
himself principal debtors of each other.
Number Only one Two obligations  Both debts consist in a sum of money, or of
of obligation consumable things of the same kind and
obligation
quality.
Payment Impossibility Indirect payment
 The two debts are due or demandable.
of payment
 The two debts are liquidated.
  No retention or controversy commenced by  When compensation has taken place AFTER INSTANCES WHEN LEGAL COMPENSATION IS NOT
a third person. assignment: ALLOWED BY LAW

EFFECTS: With Debtor’s With Debtor’s Without  Where one of the debts arises from a
Consent Knowledge but Debtor’s depositum
 Effects rise from the moment all the requisites without Knowledge o Depositum – a loan which creates the
concur. Consent relationship of debtor and creditor.
 Debtor claiming its benefits must prove Debtor’s Debtor may set Debtor may
 Where one of the debts arises from a
compensation; once proven, effects retroact consent to up setup
assignment of compensation of compensation of commodatum
from the moment when the requisites
credit debts (maturing) all credits o Commodatum – a gratuitous contract
concurred.
constitutes a before the (maturing) prior whereby one of the parties delivers to
 Both debts are extinguished to the concurrent waiver of assignment of to the another something not consumable so
amount, even though the creditors and debtors compensation, credit but not of assignment and that the latter may use the same for a
are not aware of the compensation. unless he subsequent also latter ones
certain time and return it.
 Accessory obligations are also extinguished. reserved his ones. until he had
right to knowledge of  Where one of the debts arises from a claim for
ARTICLE 1284: When one or both debts are rescissible compensation. the assignment. support due by gratuitous title
or voidable, they may be compensated against each  Where one of the debts consists in civil liability
other before they are judicially rescinded or avoided. arising from a penal offense
ARTICLE 1286: Compensation takes place by operation
 Obligations due to the government
ARTICLE 1285 of law, even though the debts may be payable at
 Damage caused to the partnership by a partner
 When compensation has taken place BEFORE different places, but there shall be an indemnity for
assignment: expenses of exchange or transportation to the place of RULES ON APPLICATIONN OF PAYMENTS APPLY TO
- The debts are extinguished to the payment. ORDER OF COMPENSATION
concurrent amount.
- Assigned by the creditor to a third person;  Indemnity is paid by the person who raises the  Inform the creditor which of the various debts
the debtor may raise defense with respect defense. shall be the object of compensation.
to the debt.  Foreign Exchange – conversion of an amount of  If fails to do so, the compensation shall be
- (Remedy) The right to the compensation
money from one country to another. applied to the most onerous obligation.
may be waived by the debtor before or
after assignment.  Exchange Rate – price of one currency
FACULTATIVE COMPENSATION: compensation which
expressed or quoted in relation to another
can only be set up at the option of a creditor, when
country.
legal compensation cannot take place because some
legal requisites in favor of the creditor are lacking.
Creditor may renounce his right to compensation, and
he himself may set it up. As opposed to voluntary new obligation are on  The modification or extinguishment of the
compensation, facultative compensation is unilateral every point incompatible obligation
and does not depend upon the agreement of the with each other.  The creation of new valid obligation
> No specific form is
parties.
required, all is prescribed TEST OF INCOMPATIBILITY: whether or not the old
by law is an
SECTION 6 – Novation and new obligation can stand together, each one
incompatibility between
having an independent existence. No incompatibility
NOVATION – modification or extinguishment of an the two contracts.
(3) EXTENT OR EFFECT exists when they can stand together. Hence, there is
obligation by another, either by changing the object or no novation. Incompatibility exists when they cannot
TOTAL or EXTINCTIVE >Old obligation is
principal condition, substituting the person of the completely extinguished. stand together. Hence, there is novation.
debtor, or subrogating a third person in the rights of PARTIAL or >Old obligation still
the creditor. MODIFICATORY remains in force except as
it have been modified.
2 FUNCTIONS: KINDS OF RIGHTS OF THE EFFECTS IF NEW
(4) SUBJECT
SUBSTITUTION NEW DEBTOR IF DEBTOR IS
REAL or OBJECTIVE >Novation by changing
(1) To extinguish an existing obligation HE MAKES INSOLVENT
the object or principal
PAYMENT
(2) To substitute a new one in its place. condition.
EXPROMISION > If the > Shall not give
PERSONAL or SUBJECTIVE >Novation by change of
> A third person substitution was rise to any
KINDS OF NOVATION the parties (debtor or
initiates the without the liability on the
AS TO: MEANING creditor).
substitution and knowledge or part of the
(1) ORIGIN Kinds:
assumes the against the will original debtor.
LEGAL Takes place by operation (1) SUBSTITUTION (1) When the person of
obligation even of the original > Original
of law the debtor is substituted
without the debtor can only debtor is
CONVENTIONAL Takes place by agreement (2) SUBROGATION (2) When a third person is
knowledge or recover insofar released from
of the parties subrogated in the rights
against the will as the payment liability, with or
(2) CONSTITUTION or FORM – Novation is not of the creditor
of the debtor. has been without the
presumed MIXED >Change of object and
beneficial to theknowledge of
EXPRESS > When it is so declared parties to the obligation
debtor. the debtor or
unequivocal terms. against his will
> Parties expressly or it has consent
REQUISITES:
disclose that their object from him.
in executing the new DELEGACION > He can recover > The creditor’s
 A previous valid obligation
contract is to extinguish > It is the debtor what he has right to proceed
the old one.  Capacity and intention of the parties to modify
who initiates the paid and is against the
IMPLIED >When the old and the or extinguish the obligation substitution, entitled to original debtor
which requires subrogation. is not revived novation is one KINDS OF SUBROGATION:
the consent of except when where a third
all parties insolvency of person is (1) CONVENTIONAL SUBROGATION – change of
(original debtor, the new DR was subrogated in creditor by the agreement of the parties (original
creditor, new already existing the rights of the parties (debtor and old creditor) and new creditor).
debtor). and: creditor.
(1) Of public NEW OBLIGATION New obligation and novation is (2) LEGAL SUBROGATION – subrogation by operation
knowledge IS VOID (ART. 1297) void. Original one shall subsist, of law. It is presumed that there is a legal subrogation
when the UNLESS the parties intended in the following cases:
original DR that the former relation will be
delegated his extinguished in any event. (a) When a creditor pays another creditor who is
debt. NEW OBLIGATION New obligation only voidable, preferred, even without the debtor’s knowledge.
(2) Known to the IS VOIDABLE (ART. novation can take place,
original DR at 1297) however it is annulled. Novation (b) When a third person, not interested in the
the time he must be considered as not obligation, pays with the express or tacit approval of
delegated his having taken place, and the the debtor.
debt. original one can be enforced,
UNLESS the intention of the (c) When, even without the knowledge of the debtor,
parties is otherwise. a person interested in the fulfillment of the obligation
EFFECTS OF/IF GENERAL RULE EXCEPTIONS OLD OBLIGATION The novation is void if the pays, without prejudice to the effects of confusion as
NOVATION ON When the (1) When IS VOID (ART. 1298) original obligation is void
ACCESSORY principal accessory to the latter’s share.
because there is no obligation
OBLIGATIONS obligation is obligation was to extinguish since it is non – EFFECTS OF:
(ART. 1296) extinguished in established for existent.
consequence of the benefit of OLD OBLIGATION The novation is valid provided (1) LEGAL SUBROGATION: to transfer to the new
a novation, third persons IS VOIDABLE (ART. that annulment may be claimed creditor the credit and all the rights and actions that
accessory who did not give 1298) only by the debtor or when
obligations shall their consent. could have been exercised by the former creditor
ratification extinguishes acts
also be (2) When there which are voidable. It cures either against the debtor or third persons, be they
extinguished. was a stipulation whatever defects present in the guarantors or mortgagors.
that the original obligation
accessory (2) PARTIAL SUBROGATION: a creditor, to whom
ORIGINAL The new obligation shall be
obligation will OBLIGATION subjected to the same condition partial payment has been made, may exercise his right
subsist SUBJECT TO A UNLESS otherwise stipulated by for the remainder, and he shall be preferred to the
notwithstanding CONDITION (ART. the parties. person who has been subrogated in his place in virtue
the novation. 1299) of the partial payment of the same credit.
(3) When the
 CONTRACTS – GENERAL PROVISIONS
CONTRACT – a meeting of minds between two
persons whereby one binds himself, with respect to
the other, to give something or to render some
service. (ARTICLE 1305)
CONTRACT
One of the sources of
obligations.
There can be no contract
if there is no obligation
accepted in return for
some benefit to be
enjoyed.
CONTRACT
Binding agreements
enforceable through legal
proceedings in case other
party does not comply
with his obligation under
the agreement. To be
valid and enforceable, it
must be lawful and all the
requisites for its validity
must be present.
All contracts are
agreements.
(1) NAME OR DESIGNATION:
OBLIGATION
The legal tie or relation
itself that exists after a
contract has been
entered into.
It may exist without a
contract (e.g. obligation
imposed by law to pay
taxes)
AGREEMENT
Broader than a contract
because it may not have
all the elements of a
contract that create
legally enforceable
obligations.
(2) PERFECTION OR FORM
Not all agreements are
contracts.
CLASSIFICATION OF CONTRACTS
(AS TO :)
(3) CAUSE
 NOMINATE – those which have a name under
the law (e.g. sale, loan, and barter).
 INNOMINATE – those without any name under
the law.
o Do ut des (I give that you have give
o Do ut facias (I give that you may do).
o Facio ut des (I do that you may give
o Facio ut facias (I do that you may do)
 Rules that govern innominate
contracts
 Stipulation of the parties
 Provisions of ObliCon
 Rules governing the most
(4) OBLIGATORY FORCE
analogous nominate
contracts
 Customs of the place
 CONSENSUAL –perfected by mere consent (e.g.
sale and lease).
 REAL – perfected by the delivery of the object
of the contract (e.g. depositum, pledge, and
commodatum)
 FORMAL OR SOLEMN – those which must be in
the form provided by law for their perfection
(e.g. donation of an immovable which together
with the acceptance by the donee, must be in a
public instrument to be valid).
 ONEROUS – there is an exchange of valuable
considerations (e.g. sale and barter). For each
contracting party, the cause is the prestation or
the promise of a thing or service by the other.
 REMUNERATORY OR REMUNERATIVE – where
the cause is the service or benefit
remunerated.
 GRATUITOUS – where one party receives no
equivalent consideration (e.g. donation and
commodatum). Contracts of pure beneficence,
the cause of which is the liberality of the
benefactor.
 VALID – those that meet all the legal
requirements and limitations for the type of
agreement involved and are, therefore, legally
binding and enforceable.

RESCISSBLE – those validly agreed upon
because all the essential elements exist and,
therefore, legally effective, but in the cases
established by law, the remedy of rescission is
granted in the interest of equity.
 VOIDABLE – those which possess all the
essential requisites of a valid contract but one
of the parties is incapable of giving consent, or
consent is vitiated by mistake, violence,
intimidation, undue influence, or fraud.
  UNENFORCEABLE – those that cannot be
enforced or given effect in a court of law or
sued upon by reason of certain defects
provided by law until and unless they are
ratified according to law.
 VOID OR INEXISTENT – those which, because
of certain defects, generally produce no effect
at all.
(5) PERSON OBLIGED
 UNILATERAL –when it creates an obligation on
the part of only one of the parties (e.g.
commodatum, gratuitous, deposit).
 BILATERAL – when it gives rise to reciprocal
obligations for both parties (e.g. sales, lease).
(6) RISKS
 COMMUTATIVE – those where the parties give
equivalent values (e.g. sale and barter); hence,
there is real fulfillment.
 ALEATORY – those whose fulfillment depends
upon chance (e.g. insurance contract).
(7) STATUS
 EXECUTORY – one which has been performed
 EXECUTED – one that has not yet been
performed
(8) DEPENDENCE TO ANOTHER CONTRACT
 PREPARATORY – one which serves as a means
by which other contracts may be entered into
(e.g. agency and partnership).
 ACCESSORY – one whose existence depends
upon another contract (e.g. pledge or
mortgage which is dependent upon a principal
contract such as loan).
 PRINCIPAL – one that can stand by itself (e.g.
sale, loan).
(9) DEPENDENCE OF PART OF CONTRACT TO OTHER
PARTS
 INDIVISIBLE – when each part of the contract is
dependent upon the other parts for
satisfactory performance (e.g. sale of dining
room table and 8 matching chairs).
 DIVISIBLE – when one part of the contract may
be satisfactorily performed independently of
the other parts (e.g. sale of rocking chair and a
pair of shoes).
ESSENTIAL REQUISITES OF CONTRACTS
CLASSES OF ELEMENTS OF A CONTRACT:
(1) ESSENTIAL ELEMENTS (REQUISITES) – without
which no contract can validly exist regardless of the
intentions of the parties.
 COMMON – present in all contracts
(consent, object, and cause)
 SPECIAL – not common to all contracts or
those which must be present only in certain
specified contracts.
o Form
o Subject matter
o Consideration or cause
(2) NATURAL ELEMENTS – presumed to exist in certain
contracts unless the contrary is expressly stipulated by
the parties.
(3) ACCIDENTAL ELEMENTS – peculiar stipulations,
clauses, terms, or conditions established by the parties
in their contract.
STAGES OF CONTRACT:
(1) PREPARATION OR NEGOTATION – this includes
all the steps taken by the parties leading to the
perfection of the contract. At this stage, the
parties have not yet arrived at any definite
agreement
(2) PERFECTION OR BIRTH – this is when the
parties have come to a definite agreement or
meeting of the minds regarding the subject
matter and cause of the contract
- HOW CONTRACTS ARE PERFECTED
o (1) Consensual Contracts –
perfection by mutual consent, even
if the subject matter or the
consideration has not been
delivered.
 In the absence of delivery,
perfection does not transfer
 title or create real right, yet,
it gives rise to obligations
binding upon both parties.
o (2) Real Contracts – perfected not
merely by consent but by the
delivery, actual or constructive, of
the object of the obligation.
(3) CONSUMMATION OR TERMINATION – this is
when the parties have performed their
respective obligations and the contract may be
said to have been fully accomplished or
executed, resulting in the extinguishment or
termination thereof.