Section 4- Confusion or Merger of Rights

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 person2. 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 causa2. Extent or effect- Total or partial

May be partial:1. When the confusion or merger refers only

to a part of the obligation2. 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 - Only up to the share

Effect of Revocation of Confusion

- Revoked by presence of:1. Causes for rescission2. Annulment3. Nullity or inexistence of contract4. 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 law2. Guaranty for the effectivity of credit

Book: distinctions

Kinds of Compensation:1. Legal2. Voluntary3. 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 due4. Both debts must be liquidated and

demadable5. 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

other2. 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 1/5/2011B 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 10,000B owes A Php 2,000

B assigns his right to C

Situation 2:

A owes B Php 1,000 due Nov. 1B owes A Php 2,000 due Nov. 10A 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 1B owes A Php 2,000 Nov 10A 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 confidence2. Self Preservation

Article 1289-90. Effect of Compensation- Several Compensation

o Order of compensationo 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

conditions2. Substituting another in place of the debtor3. 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 obligation2. Agreement of the parties to the new

obligation3. 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 extinguishment2. Partial- modification

Change of cause- may be a form of novationChange 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. Object2. Cause3. 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 paymentb2. Additional security3. Postponement of the date of payment4. 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 filed7. Third person who has assumed the

obligation merely becomes a co-debtor or surety

Implied novation:1. Change of the parties2. Amount3. 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 debtorc. 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 debtora. If expromision is used- the original

debtor can still raise this defense2. 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 AssignmentRules Article 1300- Aritcle 1624-

governing 1304 27Necessity of debtor’s consent

Required Not required

Effect upon Obligation

Extinguishing the old; establishing a new one

Transmitting the rights of the creditor without modifying or extinguishing the obligation

Effect upon vices

Defects or vices are cured

Not cured

Time of effectivity

From the moment

Moment of 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

Effect of Partial Subrogation- Rights with respect to the remainder are

not affected by the subrogationo Therefore, both rights will existo In case of conflict, the real creditor

is preferred