Extinguishment of Obligations

LOSS OF THE THING DUE

A thing is considered lost when it perishes, goes out of commerce, r disappears in such a way that its existence is unknown or cannot be recovered. (ART.1189, par.2 ) Loss includes physical or legal impossibility of the service in which the obligation consists LOSS OF A DETERMINATE THING As the general rule, the loss of a determinate thing extinguishes the obligation. (ART. 1262) The following are the exceptions:

1. When the loss is due to the fault of the debtor (ART. 1262) Loss of the thing while in the possession of the debtor shall be presumed to be due to his fault, unless proved to be otherwise. This presumption shall not apply in case of earthquake, flood, storm, or other natural calamity (ART.1265) 2. When the debtor has incurred in delay. (ART. 1262) 3. When so provided by law. (ART. 1262) As when the debtor has promised to deliver the same thing to two or more persons who do not have the same interest. (ART. 1165) 4. When it is stipulated by the parties. 5. When the nature of the obligation requires the assumption of risk. (ART.1262) 6. When the debt proceeds from a criminal offense unless the person who should receive it refuses to accept it without just cause. (ART. 1268) LOSS OF A GENERIC THING The loss or destruction of anything of the same kind does not extinguish the obligation. (ART. 1263) EXCEPTION: In case of a delimited generic thing, such as 100 cavans of rice from my harvest this year when such harvest is destroyed. LOSS IN PERSONAL OBLIGATION (Obligations to do)

1. When the prestation becomes legally and physically impossible without the fault of the debtor, the obligation is extinguished. (ART. 1266) 2. When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may be released in whole or in part. (ART. 1267) Effect of Partial Loss

The court shall determine whether under the circumstances, the partial loss of the obligation is so important as to extinguish the obligation. (ART. 1264) Creditors Right if the Loss is caused by a third person

If the obligation has been extinguished by the loss of the thing, the creditor shall have all the rights which the debtor may have against third persons by reason of the loss. (ART. 1269) Example: D is obliged to give a specific carabao to C. X steals the carabao and slaughters it. Ds obligation is extinguished. C has a right to proceed against X. Assignment of the right by D to C is not required since it is the law that gives C the right. Case/s: GLOBE v PHILCOMSAT ARTIVLE 1174 which exempts an obligor from liability on account of fortuitous events or force majeure, refers not only to events that are unforeseeable, but also to those which are foreseeable, but inevitable.

CONDONATION or REMISSION Condonation or remission is the gratuitous abandonment by the creditor of his rights. It refers to the forgiveness of indebtedness. To extinguish the obligation it requires the debtors consent (ART.1170) Example: D owes C Php3,000.00. The debt is evidenced by a promissory note. C informs D that he will no longer collect the debt and delivers the promissory note to D. D accepts Cs generosity. Ds obligation is extinguished by condonation or remission. Reason behind the necessity of acceptance: No one is compelled to accept the generosity of another. Kinds of Condonation or Remission

1. As to amount or extent a. Total when the total obligation (both the principal and accessory obligations) is remitted. b. Partial when only a part of the obligation, or only the accessory obligation is remitted. 2. As to form a. Express one made orally or in writing. It must, to be valid, comply with the formalities of donation as follows: i. 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 (donee) must satisfy. (ART 749)

ii. When the remission involves a movable/personal property

1. If the value of the property exceeds Php5,000.00, the remission and the acceptance must be in writing (public or private). 2. If the value of the property is Php5,000.00 or less, the remission and the acceptance may be in any form. The remission, however, if made orally, requires the simultaneous delivery of the thing or document representing the right demanded. (ART. 748) b. Implied one inferred from the conduct of the parties, such as when the creditor voluntarily delivers the private document evidencing he credit to the debtor. (ART.1271) Presumption when the private document evidencing debt is found in the possession of the debtor The private document is presumed to have been delivered voluntarily by the creditor to the debtor (so as to remit the obligation), unless the contrary is proved (Art. 1272) What if the creditor voluntarily destroys the document evidencing credit? It is an implied remission. Art. 1271 does not exclude other acts of implies or tacit remission When the obligation is joint, and the private document evidencing debt is found in the possession of one of the debtors, the presumption of remission can refer only to the portion of the debtor who is in possession of the instrument. And if the delivery was made by only one joint creditor, only the share pertaining to him shall be deemed remitted. When the obligation is solidary, the remission must be considered as total Presumption when the 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 The accessory obligation of pledge is presumed remitted but not the principal obligation. (ART.1274) Effect of the remission/renunciation of principal obligation on the accessory obligation and viceversa 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 it that of the principal debt. (ART.1273) When is donation inofficious? When it exceed the amount he may give or receive by will. The donor cannot prejudce the rights of his compulsory heirs.

CONFUSION OR MERGER It is the meeting on one person of the qualities or the characters of creditor and debtor. (ART. 1275)

Example: M makes a promissory note payable to P or order. P indorses the note to A, A to B, B to C, the C to M. the obligation here is extinguished because M now is the creditor of himself. Effect of merger when there is a guarantor

1. Merger which takes place in the principal debtor or creditor benefits the guarantors (ART.1276) Here both the principal obligation and the guaranty are extinguished. Example: M owes P Php10,000.00. The debt which is evidenced by a promissory note, is guaranteed by G. P assigns the note to A, A to B, B to C, and C back to M. Ms debt is extinguished. Gs guaranty is likewise extinguished since the principal obligation it secures has been extinguished. 2. Merger which takes place in the person of the guarantor does not extinguish the obligation. (ART. 1276) Here, only the guaranty is extinguished. Example: if in the immediately preceding example, C assigns the note to G instead of M, Gs guaranty is extinguished because the qualities of creditor and debtor are merged in his person. However, Ms obligation is not extinguished. G, as the new creditor, may still go after him. Merger in a joint obligation Merger extinguishes only the share of the joint debtor or creditor in whom the characters of debtor or creditor concur. (ART. 1277) Example: A, B, and C are joint debtors of X for Php9,000.00. The promissory note evidencing the debt is assigned by X to Y, Y to Z, and Z to A. As share of Php3,000.00 is extinguished by the merger of the qualities of debtor and creditor in his person. B and C are still liable on the note with A now as the creditor for Php6,000.00. Merger in solidary obligation Merger in one of the solidary debtors or solidary creditors extinguishes the whole obligation. (Art.1215) The solidary debtor in whom the characters of debtor and creditor concur can demand reimbursement from his co-debtors. (Art.1217) In the case of solidary creditor, he shall be liable to his co-creditors for the share corresponding to each of them. (Art.1215) Example: A, B, and C are solidary debtors of X for Php9,000.00. The promissory note evidencing the debt is assigned by X to Y, Y to Z, and Z to A. the whole obligation is extinguished by confusion with all the debtors now being the creditors. A may demand reimbursement from B and C at Php3,000.00 each.

COMPENSATION

It is a mode of extinguishing an obligation when two persons, in their own right, are debtors and creditors of each other. (ART. 1278) Example: D owes C Php5,000.00. C owes D Php5,000.00. The parties do not need to pay each other as their obligations are extinguished by compensation

Kinds of compensation

1. As to amount or extent a. Total when the debts are of the same amount (ART. 1281) b. Partial when the debts are of different amounts (ART. 1281) 2. As to cause or origin a. Legal takes place by operation of law and extinguishes both debts to the concurrent amount (ART. 1279) even though the debts are payable at different places (ART.1286) ad the creditors and debtors are not aware of the compensation. (ART 1290) it has the following requisites (ART. 1279): i. That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other. Example: (a) D owes C Php5,000.00. C owes D Php5,000.00. Legal compensation takes place because D and C are principal debtors and creditors of each other. (b) D owes C Php5,000.00 with G as guarantor. C owes G Php5,000.00. Legal compensation may not take place between D and C because while D is a principal debtor of C, C is not even a debtor of D. legal compensation may not take place between G and C because although C is a principal debtor of G, G is only a subsidiary debtor of C.

Exception to the first requisite A guarantor may set up compensation as regards what the creditor may owe the principal debtor. (ART 1280) Example: D owes C Php5,000.00. C owes D Php4,000.00. On due date, C demands payment from D but D no longer has any assets so C goes after G. G may set up compensation up to Php4,000.00 so C can collect from him Php1,000.00 only.

ii. 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. - There can be no compensation in obligation to do. -Consummable means that the thing is susceptible of substitution. -There can be no legal compensation if obligations are not of the same kind.

iii. That the two debts be due The maturity date of both debts must have arrived for legal compensation to take place. iv. That both debts be liquidated and demandable Liquidated means the amount of the debts has already been determined or is easily determinable. Demandable means both debts must be enforceable, so if one of them has prescribed, legal compensation cannot take place. v. That over neither of the there be any retention or controversy commenced by third persons and communicated in due time to the debtor. Example: D owes C Php10,000.00 C owes D Php10,000.00. C also owes X Php10,000.00. X sues C and asks the court to order D not to pay C so that in the event the court renders judgment in favor of X, D will have to pay X. There can be no legal compensation between D and C because there is an order of retention to D with respect to his debt to C. (garnishment, ART 1243) b. Voluntary or Conventional takes place by agreement of the parties, such as when they agree to the compensation of debts which are not yet due. (ART.1282) c. Judicial compensation ordered by court. In ART.1283, if one of the parties to a suit over an obligation has a claim for damages against the other, the former may set it off by proving is right to said damages and the amount thereof. d. Facultative compensation may be claimed or opposed by one of the parties (such as when not all the requisites for legal compensation are present). Following are instances of facultative compensation (because legal compensation cannot take place) i. When one of the debts arises from a deposit, (ART. 1287) A deposit is a contract where a person receives a thing belonging to another for safely keeping it and of returning the same. (ART 1962) The depositor may claim or oppose the compensation, but not the depositary. The deposit referred to here is different from bank deposit which is actually a contract of loan. Example: C is the depositary of Ds ring. Previously, D made a promise to a ring to C. if D demands the return of the ring he deposited with C, C cannot refuse to return it by claiming that D owes him a ring. However, if C demands the delivery of a ring from D as D had promised, D may at his option, set off the claim of C against his own claim for the return of the ring he deposited. ii. When one of the debts arises from the obligations of a bailee in commodatum. (ART.1287) Commodatum is a contract whereby the bailee acquires the use without the compensation of the thing loaned but not its fruits. (ART.1935) Here, the lender may claim or oppose the compensation, but not the borrower. Example: C borrowed Ds bicycle. D has a promise to give a bicycle to C.if D demands the return of the bicycle he lent to C, C cannot refuse to

return it by claiming that D owes him a bicycle. However, if C demands the delivery of a bicycle from D as D has promised, D may, at his option, set off the claim of C against his own claim for the return of the bicycle he loaned to C. iii. When one of the debts arises because of a claim for support by gratuitous title. (ART. 1287) the support referred to here is future support not support in arrears. (ART. 301) the party entitled to receive support may claim or oppose compensation, but not the party required to give support. Example: H, husband, was ordered by the court in a case of legal separation, to give a monthly support of Php20,000.00 to W, his wife. H has not yet given the amount to W for the present month. On the other hand, W owes H Php20,000.00 by way of loan. W may claim compensation but not H. iv. When one of the debts consists in civil liability arising from a penal offense. (ART.1288) Here, the offended party may claim compensation not the offender. Compensation when one or both debts are rescissible or voidable When one or both debts are rescissible or voidable, they may be compensated against each other before they are judicially rescinded or avoided. (ART.1284) Compensation when the debts are payable at different places 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 place of payment. (ART.1286) Rule on application of payment to apply when there are several debts susceptible of compensation Example: D owes C the following debts on account of various merchandise purchases which he made from the store of C: Php3,000.00 due on March 1, 2002; Php3,000.00 due on March 15, 2002; Php3,000.00 due on March 31, 2002; and Php3,000.00 due on April 15, 2002. C, on the other hand, owes D Php3,000 due on April 5, 2002. On April, 2, 2002, D may claim compensation for any of the debts due on March 1, March 15, and March 31. If D does not designate the debt to which the compensation shall apply, the rights shifts to C, and if C also fails to avail himself of that right, compensation shall be applied proportionately to the three debts due at Php1,000.00 each. 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 he reserved his right to the compensation. Example: D owes C Php20,000.00 due on March 15. C owes D Php8,000.00 due on March 10. On March 12, C assigned his credit right to T with the consent of D. On March 15, T can collect from D Php20,000.00. If D reserved his right to the compensation that would pertain to him against C amounting to Php8,000.00 when he consented to the assignment, then T can collect only Php12,000.00 from D.

2. If the debtor was notified of the assignment but he did not consent thereto, the debtor may set up compensation of debts maturing before the assignment but not of subsequent ones. Example: D owes C Php20,000.00 due on March 15. C, on the other hand, owes D the following debts: Php8,000.00 due on March 1; Php3,000.00 due on March 8; and Php5,000.00 due on March 14. On March 12, C assigned his credit right to T with notice to D but D did not give his consent to the assignment. In this case, T may collect from D Php9,000.00 because D can set up compensation with respect to debts due on March 1 and March 8 which had already matured at the time of the assignment. 3. If the assignment was without knowledge of the debtor, he can set up compensation of all debts maturing before the time he obtains knowledge of the assignment. Example: D owes C Php20,000.00 due on March 25. C on the other hand owes D the following debts: Php8,000.00 due on March 1; Php3,000.00 on March 8; Php5,000.00 due on March 14; and Php2,000.00 due on March 31. On March 12, C assigned his rights to T without the knowledge of D. On March 16, D learned of the assignment. In this case, T may collect from D Php4,000.00 because D may set up compensation with respect to the debts due on March 1, March 8, and March 14, which debts have become due as of March 16 when D learned of the assignment. Compensation in solidary obligations A is indebted to X, Y, and Z, solidary creditors, for Php30,000.00 due on June 1, 2002. X in turn owes A Php30,000.00 due on June 1, 2002. Both obligations being due, they are extinguished by compensation. However, X has to give Y and Z their respective shares at Php10,000.00 each because compensation made by any of the solidary creditors shall render him liable to the others for the share in the obligation corresponding to them. (ART.1215) There can be legal compensation if BOTH obligations arise from criminal offenses There can be no legal compensation if one is a civil obligation while the other is a natural/moral obligation for it is no longer demandable.

NOVATION

It is the modification or extinguishment of an obligation by another, either by changing the object or principal condition, substituting the person of the debtor, or subrogating a third person in the rights of the creditor. (ART.1291) Example: D owes C Php10,000.00. (1) If the parties later agree that D should give a ring to C, there is novation by changing the object or prestation. (2) If the parties agree that T shall take the place of D as the new debtor, there is ovation by substituting the person of the debtor. (3) If the parties later agree that X shall take the place of C as the new creditor, there is ovation by subrogating a third person in the rights of the creditor. Requisites of Novation 1. There must be a previous and valid obligation

2. There must be an agreement between the parties to modify or extinguish the obligation, except in the following: a. When a creditor pays another creditor who is preferred, even without the debtors knowledge. b. 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. c. The extinguishment of the old obligation. d. The validity of the new obligation. Kinds of Novation 1. According to object or purpose a. Real or objective novation by changing the object or the principal condition. (ART. 1291) b. Personal or subjective novation by change of the parties (debtor or creditor) i. Substituting the person of the debtor (always with creditors consent)

a. Expromision third person initiates the substitution and assumes the obligation even without the knowledge of or against the will of the debtor

Rights of the new debtor if he makes payment: If the substitution was without the knowledge or against the will of the original debtor, the new debtor can only recover insofar as the payment has been beneficial to the debtor. (ART. 1236, 1237, 1293)

Effect if the new debtor is insolvent or does not fulfill obligation If the substitution is without the knowledge or against the will of he debtor, the new debtors insolvency or non-fulfillment of the obligation shall not give rise to any liability on the part of the original debtor. (ART 1294) The original debtor is released from liability.

b. Delegacion debtor initiates the substitution, which requires the consent of all the parties (original debtor, creditor, and new debtor)

Rights of the new debtor if he makes the payment

He can recover what he has paid and is entitled to subrogation. (ART. 1236, 1237, and 1293)

Effect if the new debtor is insolvent The creditors right to proceed against the original debtor is not revived EXCEPT: (1) When the insolvency of the debtor was already existing and of public knowledge when the original debtor delegated his debt (2) When the insolvency of the new debtor was already existing and known to the original ii. Subrogating a third person in the rights of the creditor. Subrogation transfers to the person subrogates the credit with all the rights appertaining thereto, either against the debtor or against third persons, be they guarantors, possessors of mortgages, subject to stipulation in conventional subrogation. (ART. 1303)

Kinds of Subrogation a. Conventional Subrogation change of creditor by the agreement of the parties (the original parties and the new creditor) b. Legal subrogation subrogation by operation of aw. It is presumed that there is legal subrogation in the following cases: (1) When the creditor pays another creditor who is preferred, even without the debtors knowledge. Example: D owes C Php50,000.00. The debt is secured by a ortgage. D also owes X Php40,000.00 which is unsecured. If X pays Ds debt to C, X is subrogated in the rights of C. Hence, if D cannot pay the debt of Php50,000.00 X can foreclose the mortgage. (2) When a third person, not interested in the obligation, pay with express and 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 latters share. (ART.1302) Example: D owes C Php10,000.00 with G as guarantor. If G pays C, G is subrogated in the rights of C. However, Gs guaranty is extinguished because the qualities of debtor and creditor are merged in his (Gs) person. c. Mixed change of the object and the parties to an obligation

Example: D owes C Php50,000.00. Later, the parties agree that a ring will be used to pay the debt with X making the payment.

2. According to form a. Express novation declared in unequivocal terms (ART 1292)

Example: D and C entered into a contract whereby D would construct a 3-storey building for C on a certain lot. Later however D and C entered into a contract, whereby they expressly agreed that D would not be constructing anymore a 3-storey building on the lot but a bungalow. b. Implied when the old and the new obligation are on every point incompatible with each other. (ART.1292) Example: In the same example, if D and C entered into the second contract whereby D agreed to construct a bungalow on the lot but without the parties expressly stipulating that D would no longer construct a 3-storey building, then the parties are deemed to have impliedly novated the first contract because the two structures on the same lot would not be possible.

4. According to extent a. Total or extinctive here the old obligation is totally extinguished, such as when an obligation to pay a sum of money is replaced with an obligation to give a diamond ring. b. Partial or modificatory here, the old obligation till remains in force except as it has been modified, such as when the place of payment is changed or when there is a variation in the amount of installment payments. Effect of novation on accessory obligation When the principal obligation is extinguished in consequence of a novation, accessory obligations shall also be extinguished except with respect to those established for the benefit of third persons who did not give their consent. (ART 1296) Example: D borrowed Php50,000.00 from C. The obligation is secured by a chattel mortgage on Ds car and bears an interest at 10% per annum which the parties stipulated will be paid by D to T, a student whom C is sending to school. Subsequently, D and C agreed that D will give C a diamond ring instead of money. The novation here extinguishes the accessory contract of chattel mortgage. However, the accessory obligation to pay interest will subsist unless T gave his consent to the novation. Effect if new obligation is void 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 the original obligation is void

The novatiion is void if the original obligation is void. (ART.1298) If the original obligation is void, there is no obligation to extinguish since it is non-existent. Effect if the original obligation is voidable The novation is valid provided that the annulment may be claimed only by the debtor or when ratification extinguishes any acts which are voidable. (ART.1298) The novation here cures whatever defects present in the original obligation. Example: D executed a promissory note for Php50,000.00 representing the price of the car that C, by means of violence, sold to D. Later, when the violence has ceased, D proposed to C that D would give his ring instead of Php50,000.00. C accepted the proposal. The novation here is valid. Whatever defect in the consent present in the original one is deemed cured by the new obligation to give the ring. Effect if original obligation is subject to a suspensive or resolutory condition. The new obligation shall be subject to the same condition unless otherwise stipulated by the parties. Preference of creditor in case of partial payment A creditor to whom partial payment has been made, may exercise his right for the remainder, and shall be preferred to the person who has been subrogated in his place in virtue of the partial payment of the same credit. (ART.1304) Example: D owes C Php100,000.00. With the consent of both, T, a third person pays C Php50,000.00. Thus, C and T are now creditors of D at Php50,000.00 each. If D has only Php50,000.00, C will be preferred over T. Novation in solidary obligation A is indebted to X, Y, and Z, solidary creditors, in the amount of Php30,000.00. Thereafter, X, without knowledge of Y and Z, agreed with A that instead of paying Php30,000.00, A will instead give a specific ring to the creditors. The obligation of A to give Php30,000.00 is extinguished by the obligation to deliver a specific ring. However. X has to give Y and Z their respective shares at Php10,000.00 each because novation executed by any of the solidary creditors shall render him liable to the others for the share in the obligation corresponding to them. The law does not require that the original obligation be contractual in nature. The law only requires a valid civil obligation. But the new obligation must be contractual.