Part 2

Special forms of payment

. Application of payment or imputation of payment
. Cession of payment or assignment
. Dation in payment
. Tender of payment and consignation
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(1) Article 1252 (Application of Payment)
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"He who has various debts of the same kind in favor of one and the same creditor, may declare at
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the time of making the payment, to which of them the same must be applied. Unless the parties so
stipulate, or when the application of payment is made by the party for whose benefit the term has
been constituted, application shall not be made as to debts which are not yet due.
If the debtor accepts from the creditor a receipt in which an application of the payment is made,
the former cannot complain of the same, unless there is a cause for invalidating the contract"

Application of payment - designation of the debt to which should be applied when payment is
made by a debtor who owes several debts in favor of the same creditor.

Requisites of application of payments by the debtor

● There must be one debtor and one creditor
● There must be two or more debts
● The debts must be of the same kind
● All the debts must be due
● The payment is not be enough to extinguish all the debts

Requisites for a valid application of payments by the creditor

● The debtor did not make any designation on which debt should be paid when he made the
payment;
● The creditor issued a receipt expressing the application of the payment to a particular debt.
● The debtor agreed to the application of the payment to a particular debt.

Limitation of the preferential right of the debtor to choose the debt to be paid.
● The debtor cannot apply to a debt not yet liquidated or due;
● If the creditor is given a benefit of the period or term, which has not yet arrived, an
application of payment cannot be made by the debtor;
● If there is a specific agreement as to which debts shall be paid first, the debtor cannot vary
the agreement without the consent of the creditor;
● If there is principal obligation which bears interests, the debtor cannot pay the interest
without first paying the principal;
● A debtor cannot choose to pay a bigger debt partially, when the payment made can be
applied as full payment to a smaller debt.

Scenarios:
. The debtor was the one who made the application of the payment
. The creditor was the one who made the application of the payment
. By operation of Law
– Both debtor and creditor did not apply the payment
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– Someone applied the payment but it is invalid
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THE APPLICATION OF PAYMENT IS INVALID IF THE CONSENT OF THE DEBTOR IS DONE THROUGH
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FRAUD, ERROR, OR VIOLENCE.

Note:
● Once the application of payment is made, it is NOT revocable UNLESS the parties AGREE.
However, even if both party agrees, the revocation won’t be allowed if there is a third person
that would be prejudiced.

Example:
D owes C as follows:
(a) P1,500.00 payable on September 5;
(b) P1,200.00 payable on September 20;
(c) A specific table worth P2,000.00 to be delivered on September 20; and
(d) P1,000.00 payable on October 15.
On September 20, D paid C P1,500.00.

D may apply the P1,500.00 to debt (a), or to debt (b) and (if C does not object) to a portion of debt
(a). If D paid only P1,000.00, he cannot choose to apply his payment to the P1,500.00 debt because
C cannot be compelled to receive partial payment. D cannot properly apply his payment to debt (c)
because it is not of the same kind. He must deliver the thing agreed upon. Neither can he apply it to
debt (d) which is not yet due unless there is a stipulation to the contrary or he has the benefit of the
period. An application of payment made by the debtor without objection from the creditor is binding
upon the latter. His acquiescence (consent) is equivalent to an agreement and has the force and
efficacy of a contract.

Art. 1253 (FOR PARTIAL PAYMENT ONLY)

"If the debt produces interest, payment of the principal shall not be deemed to have been made
until the interests have been covered".

Note:
● The debtor cannot apply his first payment to the principal, UNLESS the creditor waived his
right.

What interests are covered?

● Interest from delay is NOT part of obligation. It is an independent liability arising from non-
perf.
● Applies to compensatory interest (stipulated as earnings of the amt. due under the obl.)
● Interest from default arises bcos. of non-perf. by the debtor.

Example:
Arthur was granted a loan by a bank, but failed to settle. 6 mos. ago, somebody sent him a msg. tru
Facebook demanding to collect over ₱200,000. He attempted to negotiate. The bank agreed to
process his loan for a max. amnesty if he has consistently paid ₱10,000 a mo. for 6 mos. After 6
mos., they gave him the amt. w/c they said contains the max. amnesty and it still showed over
₱200,000. His monthly payment is deducted fr. the int. and pen. but NOT on the prin. Unless he has
an agrmt. that the payments he made were to be applied to the prin., the Art. 1253 will apply.

Article 1254 (BY OPERATION OF LAW)

"When the payment cannot be applied in accordance with the preceding rules, or if application
cannot be inferred from other circumstances, the debt which is most onerous (burdensome) to the
debtor, among those due, shall be deemed to have been satisfied. If the debts due are of the same
nature and burden, the payment shall be applied to all of them proportionately".

Example of more onerous debt:

● An interest-bearing debt than a non-interest bearing debt
● A debt as a sole debtor than as a solidary debtor
● Older debts
● Debts secured by a mortgage or by pledge
● An obligation with a penal clause.

RULES IN CASE NO APPLICATION OF PAYMENT HAS BEEN VOLUNTARILY MADE

. Apply to the most onerous debts
. If debts are of the same nature and burden, application shall be made to all, proportionately.

Example of application of payment proportionately:

Debts: (1) 1,200,000 (2) 600,000
Payment (without application by the debtor: 300,000
Solution:
(1) 300,000 x (1,200,000/1,800,000) = 200,000 outstanding debt is 1,000,000
(2) 300,000 x (600,000/1,800,000) = 100,000 outstanding debt is 500,000

Art. 1255 Cession of Payment or Assignment

"The debtor may cede or assign his property to his creditors in payment of his debts. This cession,
unless there is stipulation to the contrary, shall only release the debtor from responsibility for the
net proceeds of the thing assigned. The agreements which, on the effect of the cession, are made
between the debtor and his creditors shall be governed by special laws".

Cession of Payment or Assignment

Cession or assignment in favor of creditors is another special form of payment. It is the assignment
or abandonment of all the properties of the debtor for the benefit of his creditors in order that the
latter may sell the same and apply the proceeds thereof to the satisfaction of their credits.
– ita-transfer ang lahat ng properties ni debtor sa mga creditors, and creditors may sell them.

REQUISITES:
. There must be two or more creditors;
. The debtor must be insolvent;
. The assignment must involve all the properties of the debtor;
. The cession must be accepted by the creditors.

EFFECTS:
Unless there is a stipulation to the contrary,
. The assignment does not make the creditors the owners of the property of the debtor
. The debtor is released from his obligation only up to the amount of the net proceeds of the
sale of the property assigned. Unless there is stipulation to the contrary, the balance remains
to be collectible.

Note:
● This provision talks about a voluntary or contractual assignment.
● The creditors does not become the owners of the properties, they were just given the
authority to sell them. If the ownership was transferred to the creditors, it will be the same as
DATION IN PAYMENT.
DATION IN PAYMENT vs. CESSION IN PAYMENT

Dation Cession
There is usually only one creditor There are several creditors
Does not presuppose the Debtor is insolvent at the time of
insolvency of the debtor or a insolvency of the debtor or a
situation of financial difficulties. assignment
Dation does not involve all the Extends to all the property of the
property of the debtor property of the debtor subject to
execution
The creditor becomes the owner of The creditors only acquire the of
the thing given by the debtor the thing given by the debtor right
to sell the thing and apply the
proceeds to their credits pro rata
(in proportion)

Art. 1256 (TENDER OF PAYMENT AND CONSIGNATION)

"If the creditor to whom tender of payment has been made refuses without just cause to accept it,
the debtor shall be released from responsibility by the consignation of the thing or sum due.
Consignation alone shall produce the same effect in the following cases:
(1) When the creditor is absent or unknown, or does not appear at the place of payment;
(2) When he is incapacitated to receive the payment at the time it is due; (pwede lang ‘to kapag
walang legal representative si incapacitated creditor)
(3) When, without just cause, he refuses to give a receipt;
(4) When two or more persons claim the same right to collect;
(5) When the title of the obligation has been lost.".

Tender of payment
- the act, on the part of the debtor, of offering to the creditor the thing or amount due.

Consignation
- the act of depositing the thing or amount due with the proper court when the creditor cannot
accept or refuses to accept payment.

Example:
X owes Y 1,000,000 due today, and Y refuses to accept the payment for no reason at all. X must
deposit the money in court.

Note:
● The refusal to accept must be unjustified.

Tender of payment must be:

. In legal tender
. Include interest
. Unconditional
Note:
● The tender of payment must be prior the consignation. The tender of payment must be
proved by the debtor in a proper case.
● If the consignation is made LATE, the interest should run.

Art. 1257.
"In order that the consignation of the thing due may release the obligor, it must first be announced
to the persons interested in the fulfillment of the obligation.
The consignation shall be ineffectual if it is not made strictly in consonance with the provisions
which regulate payment"

Essential requisites of Consignation

. Existence of a valid debt
. Valid prior tender, unless tender is excused
. Prior notice of consignation
. Actual consignation
. Subsequent notice of consignation

Note:
● Prior and subsequent notice are important. If these two were not done, the consignation is
VOID.

Art. 1258.
"Consignation shall be made by depositing the things due at the disposal of judicial authority,
before whom the tender of payment shall be proved, in a proper case, and the announcement of
the consignation in other cases.
The consignation having been made, the interested parties shall also be notified thereof".

Art. 1259
"The expenses of consignation, when properly made, shall be charged against the creditor"

Art. 1260
"Once the consignation has been duly made, the debtor may ask the judge to order the
cancellation of the obligation. BEFORE the creditor has accepted the consignation, or before a
judicial declaration that the consignation has been properly made, the debtor may withdraw the
thing or the sum deposited, allowing the obligation to remain in force "

Note:
● The obligation will remain in force because the debtor withdraws it.
● The debtor will bear the expenses under this provision.
● If the creditor has accepted the consignation or the court has already declared it to be
proper, the debtor has no right to order cancellation UNLESS there is a consent from the
creditor.

How can the creditor prevent the debtor from exercising the right to withdraw the consigned?
– BY IMMEDIATELY ACCEPTING THE CONSIGNATION.

What is the effect when the consignation was improperly made?

. The obligation remains
 . Consignation would produce no effect.

Art. 1261
"If, the consignation having been made, the creditor should authorize the debtor to withdraw the
same, he shall lose every preference (priority) which he may have over the thing. The co-debtors,
guarantors and sureties shall be released."

Example:
X owes Y 1,000,000 due today and Z is the guarantor. Y refuses to accept the payment for no
reason at all. X made a proper consignation. Before the acceptance and declaration of the
consignation, X withdraws it with the consent of Z. Later on, X became insolvent. Can Y proceed
against Z? NO, the guarantor shall be released.

LOSS
There is a Loss
● when the object perishes
● goes out of commerce
● disappears in such a way that its existence is unknown
● cannot be recovered

There is impossibility of performance

● physical impossibility
● legal impossibility

Art. 1262. Loss of Specific Thing

"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."

General Rule:
Loss of Specific Thing = Obligation Extinguished

Exceptions:
1st Par. Art. 1262 - Debtor is in default
2nd Par. Art. 1262
– Law
– Stipulations in the Contract
– Nature of Obligation requires Assumption of Risk

Examples when the law requires liability even in the case of fortuitous event:
● Debtor is in default
● Debtor promise to deliver the same thing to two or more persons who do not have the same
interest.
● Obligation arises from a crime.

Art. 1263. Loss of Generic Thing

"In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does
not extinguish the obligation "
 ● Principle "genus never perishes"

Exception:
Delimited Generic

Example:
X obliged himself to deliver to Y 100 sacks of rice from his December 20x2 harvest which is a
delimited generic thing. However, nagkaroon ng typhoon which completely destroyed the harvest of
X. The obligation, therefore, is extinguished because it is no longer possible to deliver the
object. The obligation will be converted into monetary obligation.

Note:
● Dapat delimited para ma-extinguished.

Art. 1264.
"The courts shall determine whether, under the circumstances, the partial loss of the object of the
obligation is so important as to extinguish the obligation."

● This provision talks about the effect of partial loss of a specific thing
● And it answers the question when is partial loss considered as Total loss??

Loss is so significant
Example: (Partial loss)
Loss of the body of a pen

Note:
● When the loss is so material and the remaining portion of the object is insignificant or
immaterial, partial loss of the thing may be considered as total.
● It is the the court who is given the discretion in case of disagreement of both parties.

Art. 1265
"Whenever the thing is lost in the possession of the debtor, it shall be presumed that the loss was
due to his fault, unless there is proof to the contrary, and without prejudice to the provisions of
article 1165.
This presumption does not apply in case of earthquake, flood, storm, or other natural calamity".

Note:
● Presumption LANG.

Art. 1266 "Loss" or impossibility of performance in personal obligations

"The debtor in obligations to do shall also be released (note: from liability) when the prestation
becomes legally or physically impossible without the fault of the obligor. "

● Impossibility must exist after the constitution of the obligation

Example:
(1) X obliged himself to construct a commercial building for Y. A week after, X dies. The obligation
of X has become physically impossible, therefore, the obligation is extinguished.
(2) X obliged himself to construct a commercial building for Y. However, the government refuses to
give building permit because the area has been declared by law as a residential zone. The
obligation of X has become legally impossible, therefore, the obligation is extinguished.

Art. 1267.
"When the service has become so difficult as to be manifestly beyond the contemplation of the
parties, the obligor may also be released therefrom, in whole or in part. "

Note:
● This is an exception to obligatory force of contract.

Example:
The duty to construct a road kaso nagkaroon nang malakas na earthquake so as to change the
condition of the land to the point that such construction was possible but very dangerous to drive
and build a property.

Note:
● One party must ask for released.

Art. 1268. Effect of Loss, in criminal offenses.

"When the debt of a thing certain and determinate proceeds from a criminal offense, the debtor
shall not be exempted from the payment of its price, whatever may be the cause for the loss, unless
the thing having been offered by him to the person who should receive it, the latter refused without
justification to accept it.”

Note:
● with or without the fault of the debtor, he is liable.

Example:
X stole the car of Y. X is ordered to return the car. Before delivery, nagkaroon ng sunog sa bahay ni
X.

(1) Is X’s obligation extinguished? NO, because the obligation to deliver the car arose from a
criminal offense.

(2) Supposed, before the fire, X tendered the car but Y refused to accept. Is the obligation to
deliver extinguished? YES, because the creditor is in default (mora accipendi).

(3) What should X do if Y refuse to accept? X has an option to CONSIGN the thing to the court or
keep it in his position until delivered to Y but needs to exercise the diligence of a good father of
a family

Art. 1269 Right of the creditor to proceed against third person.

"The obligation having been extinguished by the loss of the thing, the creditor shall have all the
rights of action which the debtor may have against third persons by reason of the loss.”

Example:
X obliged himself to deliver to Y a specific watch. However, Z stole the watch and lost it. According
to Article 1268, Y has the right to proceed (sue) against Z.
Art. 1270 Condonation or Remission
"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.”

Condonation - it is a gratuitous abandonment by the creditor of his right.

Example:
X owed Y 1,000,000 payable on December 2020. On December 2020, Y told X that he doesn’t need
to pay Y the 1,000,000 since she is condoning it. The obligation was extinguished through
condonation.

The requisites of Remission

. It must be gratuitous;
. It must be accepted by the obligor
. The parties must have capacity
. It must not be inofficious (excessive, this can be reduced by the court)
. If made expressly, it must comply with the forms of donation

Kinds of Remission
As to its extent:
. Complete
. Partial

As to its form:
. Express (verbal, written)
. Implied (conduct)

As to its date of effectivity:

. Inter vivos (will take effect during the life time of the donor)
. Mortis causa (will take affect upon the death of the donor, eg. last will and testament)

Art. 1271
"The delivery of a private document evidencing a credit, made voluntarily by the creditor to the
debtor, implies the renunciation of the action which the former had against the latter.
If in order to nullify this waiver it should be claimed to be inofficious, the debtor and his heirs may
uphold it by proving that the delivery of the document was made in virtue of payment of the debt. "

● Presumption in case document of indebtedness is voluntarily delivered by creditor

What is the Effect of the delivery of private document evidencing the credit?
- creates presumption of implied remission (should be voluntary)

Note:
● Presumption can be overcome by showing proof to the contrary

Example:
X issues a PN in favor of Y in an amount of 1,000,000. Later on, Y delivered the PN back to X
without collecting the 1,000,000. X is (again) in possession) of the 1M PN because Y VOLUNTARILY
delivered the PN and did not collect it. In this case, there is a presumption of implied remission/
condonation. This is just a presumption. Y can still prove that she has a different intention as to
why she delivered the PN back to X.

Art. 1272 Presumption of voluntary delivery

"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"

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."

● Accessory follows the principal.

● Principal obligation will still exist even without the accessory obligations

Example:
X owed Y 1M, and Z is the guarantor. In this case, the principal debt is the 1M. The accessory
obligation is the obligation of Z as a guarantor because as a guarantor, she will be liable.
(1) If Y renounced the principal (1M), the accessory will also be extinguished.
(2) If Y renounced the accessory, the obligation of Z will be the ONLY one extinguished. The
obligation of X will remain in force.

Art. 1274
"It is presumed that the accessory obligation of pledge has been remitted 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."

Example:
X borrowed 1M from Y, and as a guarantee, X also delivered his watch worth 1M. Later on, if the
watch was returned to the possession of X, there is a presumption that Y remitted the accessory
obligation which was pledged.

Note:
● Only the accessory obligation of pledge is presumed remitted.

Art. 1275 Confusion or Merger

"The obligation is extinguished from the time the characters of creditor and debtor are merged in
the same person.”

Confusion - is the meeting in one person of the qualities of the creditor and debtor with respect to
the same obligation.

Requisites of confusion
. It must take place between the principal debtor and creditor;
. It must be complete and definite.
. The very obligation involved must be the same or identical.

Example:
X owes Y 100k. X executed a negotiable instrument (PN) in favor of Y. Y endorsed the PN to Z. Later
on, bought goods from the store of X and instead of paying cash, Z endorsed the PN to X. In this
case, X owes himself because the PN was returned to him. He became the debtor and the creditor
at the same time. Consequently, X’s obligation is extinguished because of merger or confusion.

Usual Causes of Confusion

● Succession
● Donation
● Negotiation of a negotiable instrument (most common)

Art. 1276 Effect of Merger on Guarantors

"Merger which takes place in the person of the principal debtor or creditor benefits the guarantors.
Confusion which takes place in the person of any of the latter does not extinguish the obligation"

Example:
(1) X owes Y 1M, and Z is the guarantor. Y assigned the credit to A. Later on, A assigned the credit
to X. In this case, the obligation was extinguished and Z is released as a guarantor. Nagkaroon ng
merger sa mismong principal obligation.

(2) X owes Y 1M, and Z is the guarantor. Y assigned the credit to A. Later on, A assigned the credit
to Z. In this case, the contract of guarantee is extinguished but the principal obligation of X to Y still
remains.

What is the effect of merger and confusion?

. Obligation is extinguished (if the merger and confusion is valid)
. If there is guarantor and the merger is in the principal debtor, the obligation is extinguished
and the guarantor is released.
. If there is guarantor, and the merger is not on the principal debtor but only on the guarantor,
the principal obligation is not extinguished but the accessory is extinguished.

Art. 1277 Merger in Joint Obligations

"Confusion does not extinguish a joint obligation except as regards the share corresponding to the
creditor or debtor in whom the two characters concur."

Example:
(1) X and Y jointly owes Z 1M, evidence by a PN. If Z endorsed the PN to A, and A endorsed it again
to Y, the share of Y is extinguished BUT the share of X still remains.

(2) X and Y solidary owes Z 1M, evidence by a PN. If Z endorsed the PN to A, and A endorsed it
again to Y, the entire obligation is extinguished. Y has a right to demand reimbursement from X.

Note:
● In joint obligations, the debts are distinct and separate from each other.

Art. 1278 Compensation

"Compensation shall take place when two persons, in their own right, are creditors and debtors of
each other."

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.
Example:
X owes Y 1,0000. Y owes X 700. Assuming both debts are due and payable today. The
compensation (partially) takes place immediately by operation of law to the concurrent amount of
700. X shall be liable to Y for 300.

Confusion vs. Compensation

Confusion Compensation
One person Two persons
One obligation Two obligations

Payment vs. Compensation

Payment Compensation
takes effect by act of the parties takes effect by operation of law
the parties must have the free it is not required that the parties
disposal of the thing due and have the capacity to give or to
capacity to alienate receive, as the case may be
it is necessary that it be complete the law permits partial
extinguishment of the obligation

Kinds of Compensation
1. By its effect or extent:
● Total
● Partial

2. By its cause or origin:

● Legal
● Conventional or voluntary (mutual consent)
● Judicial
● Facultative

Example: (Facultative)
X owes Y 1M demandable and due on December 15, 2020. In another transaction, Y owes X 1M
demandable on or before December 30, 2020. On December 15, Y who is given the benefit of a
term, can claim compensation. However, X cannot force Y to pay her debt since Y’s debt is still not
demandable.

Art. 1279 Requisites of Legal Compensation

"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;
(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;
(3) That the two debts be due;
(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."
REQUISITES OF COMPENSATION
1. The parties are principal debtors and creditors of each other.

Example:
(1) X owes Y 10k. Y owes X 10k. Compensation will take place because X & Y are the principal
debtors and creditors of each other.
Example (if they are not the principal debtors and creditors of each other:
(1) X owes Y 10k, guaranteed by Z. In another transaction, Y owes Z 10k. There will be no
compensation between Y and Z although Y is principally liable to Z, Z is merely subsidiarily liable to
Y because she has no debt to Y. No compensation may apply.

2. Both debts consist in a sum of money, or of consumable things of the same kind and quality.

Example:
X obliged himself to deliver to Y 10 sacks of rice. On the other hand, Y obliged herself to deliver to X
10 sacks of corn. In this case, compensation will not take place because the obligation of the
two are consumable things but not the same kind or quality.

3. The two debts are due or demandable.

● Due - period has arrive or condition has been fulfilled
● Demandable - no debts has prescribed, debts are valid and legal

Example:
X owes Y 1M payable on December 25, 2020. Y owes X 1M payable on December 30, 2020. Can
there be a legal compensation on December 25, 2020? WALA PA, ngunit maaaring magkaroon ng
voluntary compensation upon agreement.

4. The two debts are liquidated

● Debts can already be determined or ascertained

Example:
X owes Y 10k. Y owes X share in the business, the amount is still not determined. Compensation will
not take place because the debt of Y to X is not liquidated. If part of the debt of Y has been
liquidated, compensation takes place with respect to the part without waiting for the liquidation of
the entire obligation.

5. No retention or controversy has been commenced by a third person

Example:
X owes Y 1M. Y owes X 1M, she (Y) also owes Z 1M. The credit has been garnished by beauty who
claims to be an unpaid creditor. Compensation cannot take place between X and Y because there is
a controversy which is commenced by Z (she filed garnishment proceedings). In the mean time, the
compensation is SUSPENDED.

Art. 1280 Compensation benefits guarantors

"Notwithstanding the provisions of the preceding article, the guarantor may set up compensation as
regards what the creditor may owe the principal debtor.

● Extinguishment of the obligation carries with it the accessory obligation.

Example:
X owes Y 1M, Z is the guarantor. In another transaction, Y owes X 300k. When Y ask for the
payment of X, X cannot Y. How much will Z pay as the guarantor of X? Z will be liable for 700k only.
She can set up the 300k credit of X as the basis for partial compensation.

Art. 1281.
"Compensation may be total or partial. When the two debts are of the same amount, there is a total
compensation.”

Art. 1282 Voluntary Compensation

"The parties may agree upon the compensation of debts which are not yet due.”

Note:
● Requisites under Article 1279 is not applicable in this article.
● This compensation has no special requisites.
● It is sufficient that agreement which declares compensation is valid.

Art. 1283 Judicial Compensation or Set-off

"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 his right to said damages and the amount thereof.”

Note:
● All the requisites under Art. 1279 must also be present.

Exception:
● At the time of pleading, the claim is not yet liquidated

Art. 1284 Compensation of Rescissible or Voidable Debts

"When one or both debts are rescissible or voidable, they may be compensated against each other
before they are judicially rescinded (revoked, canceled) or avoided."

Example:
X owes Y 1M. Consequently, through fraud, X was able to make Y sign a PN that Y has also a debt to
X amounted to 1M. In this case, the liability of X to Y is still valid. However, the debt of Y to X is
voidable because her consent was obtained through fraud.
(1) Before the debt of Y to X is annulled, both debts are valid. If both debts are valid, compensation
will take place.
(2) Supposed, Y filed case to nullify her debt to X, and the court annulled the debt of Y and decided
in favor of Y, X would still be liable. The effect of the annulment is retroactive as if there had been
no compensation.

Art. 1285 Effects of Assignment on Compensation

"The debtor who has consented to the assignment of rights made by a creditor in favor of a third
person, cannot set up against the assignee the compensation which would pertain to him against
the assignor, unless the assignor was notified by the debtor at the time he gave his consent, that he
reserved his right to the compensation.
If the creditor communicated the cession to him but the debtor did not consent thereto, the latter
may set up the compensation of debts previous to the cession, but not of subsequent ones.
If the assignment is made without the knowledge of the debtor, he may set up the compensation of
all credits prior to the same and also later ones until he had knowledge of the assignment."

– Under the law, pag lahat ng requisites for legal compensation are present, compensation
takes effect by operation of law, and so, both debts, are extinguished to the concurrent
amount, kahit pa nga si debtor and creditors are not aware of the compensation. Hence,
compensation actually takes place automatically. Pag the parties in their own right become
the debtor and creditor of each other and if lahat ng requisites under Art. 1279 ay present,
Compensation takes place.

Exception to said rule:

● When the assignment was made WITH THE CONSENT of the debtor.
● Consent operates as a waiver of the rights to compensation

Exception to the exception:

● When at the time he gave his consent, he RESERVED his right to the compensation.

Effect of Assignment on Compensation

● The assignment may be made with the consent of the debtor
– Compensation cannot be set up, dahil meron ngang consent and so, therefore a waiver of the
compensation.
– Exception to the exception: if the right to the compensation is reserved.

Example:
X owes Y 1,000,000 due yesterday. Y owes X 300k due also yesterday. Both debts are extinguished
automatically up to the amount of 300k since the amount are not the same. Hence, the debt of X
becomes 700k as of today. However, later on, Y assigned her credit to Z. The assignment that Y
made in favor of Z is with a consent of X. How much can Z collect from X? Z can collect 1M from X.
X cannot set up the defense of compensation before he consent to the assignment.

Take note:
If Pogi gave his consent to the assignment before it was made or subsequently, pareho lang, Article
1285 1st par applies, Pogi still loses the right to set up the defense of compensation. But he can still
collect the P300,000.00 owed by Ganda naman. In other words, the compensation shall be deemed
not to have taken place

● Assignment was made with the knowledge but without the consent or against the will of the
debtor
– Compensation can be set up regarding debts previous to the assignment

Example:
X owes Y 1M due on December 1. Y owes X 1.5M due in December 5. In another transaction, X owes
Y 500k due on December 15. X assigned his right to Z on December 10. X notified Y but Y did not
give her consent to the assignment. How much can Z collect from Y?
Answer:
(1) Y can set up the compensation of debts previous to the assignment. Hence, Y can raise the
defense of compensation with respect to the Dec. 5 debt which was before the assignment
happened.
(2) Z can collect only 500k because compensation takes place between the Dec. 1 & 5 debts. But, Y
cannot raise the defense of compensation with respect to the debt of X to the Dec. 15 debt.
 ● The assignment may be made without the knowledge of the debtor.
– Debtor can set-up compensation as a defense for all debts maturing PRIOR to his knowledge
of the assignment.
– The crucial time here is the time of knowledge of the assignment, hindi yung time of
assignment itself.

Example:
X owes Y 1M due on December 1. Y owes X 1.5M due in December 5. In another transaction, X owes
Y 500k due on December 15. X assigned his right to Z on December 10 without the knowledge of Y.
Y learned about the assignment on December 25. In this case, Y can set up compensation of credits
to all of the debts since all of the debts mentioned have already matured.

Art. 1286
"Compensation takes place by operation of law, even though the debts may be payable at different
different places, but there shall be an indemnity for expenses of exchange or transportation to the
place of payment.”

Note:
● This article applies to legal compensation.
● Whoever claims compensation, he will bear the expenses of exchange and transportation.

Example:
X owes Y $1,000 payable in New York. Y owes X ₱100k payable in Manila. If X claims compensation,
he must pay for the expenses of exchange of money.

Art. 1287 Legal Compensation cannot take place

"Compensation shall not be proper when one of the debts arises from a depositum or from the
obligations of a depositary or of a bailee in commodatum.
Neither can compensation be set up against a creditor who has a claim for support due by
gratuitous title, without prejudice to the provisions of paragraph 2 of article 301"

1. When one debt arises from a depositum.

Example:
X deposited to Y 100 sacks of rice valued at 100k. X owes Y 1M. When X withdraws his 100 sacks of
rice from Y, Y refuses to deliver. She is claiming compensation. Is Y allowed to compensate? No,
this is an obligation arising from deposit, compensation shall not be proper.

Example:
X deposited on his bank 100k. Later on, he acquired loan of 10k. Can the bank set up
compensation? Yes, deposits in bank are actually governed by a contract of loan, not a contract
of deposit.

2. When one debt arises from commodatum.

● Commodatum is a gratuitous contract whereby one of the parties delivers to another

something not consumable so that the latter may use the same for a certain time and return
it.

Example:
Y borrowed the car of X. X owed Y 1M. Later on, Y cannot refuse to return the car of X on the
ground of compensation because no compensation can take place when one of the debts arise from
a commodatum.

3. When one debt arises from a claim for support due by gratuitous title.

Example:
Papa is the father of Baby, a minor, who under the law is entitled to be supported by Papa. Now
Baby owes Papa P50,000.00. Papa cannot compensate his obligation to support Baby by what Baby
owes him because the right to receive support cannot be compensated. Hindi pwedeng sabihin ni
Papa kay Baby a 'In as much as you owe me P50,000.00, I will not pay your allowance for one year.’

Art. 1288 Non-compensation if one debt arises from a crime

"Neither shall there be compensation if one of the debts consists in civil liability arising from a penal
offense.”

Example:
Pogi owes Ganda 10,000.00. Later on, nag-away si Ganda at Pogi, at sa away nila, dahil magaling si
Ganda, she has inflicted physical injuries against Pogi. Dahil dyan, Pogi filed a case against Ganda,
and the court rendered judgement in favor of Pogi against Ganda, and ordered Ganda to pay Pogi
10,000, applying the principle "a person criminally liable is also civilly liable".

Note: Ganda has no right to set up compensation. However, Pogi, the offended party, can set up
compensation.

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.”

Example:
If X owes Y 1k without interest which is due today. He also owes Y 1k with 6% interest due today. Y
also owes X 1k due today. However, neither the two applied the payment. Most onerous debt
applies. In this case, the second debt is the most onerous and will be compensated. X still has a
debt of 1k without interest.

Art. 1290 Effect of Merger on Guarantors

"When all the requisites mentioned in article 1279 are present, compensation takes effect by
operation of law, and extinguishes both debts to the concurrent amount even though the creditors
and debtors are not aware of the compensation.”