Section 5

COMPENSATION
ART. 1278
Compensation shall take place when two
persons, in their own right, are creditors
and debtors of each other.
Compensation extinguishment to the
concurrent amount of debts of two
persons who, in their own right, are
debtors and creditors of each other.
COMPENSATION VS CONFUSION
CONFUSION COMPENSATION
One person Two person
One obligation Two obligation
Impossibility of payment Indirect payment
Kinds of Compensation
(1) By its effect or extent:
a. Total obligations are of the same amount
b. Partial two obligations are of different amounts and
a balance remains
(2) By its cause or origin:
a. Legal takes place by operation of law even without
the knowledge of the parties
b. Voluntary takes place by agreement of the parties
c. Judicial takes place by order from a court in a
litigation
d. Facultative can be set up only by one of the parties
ART 1282
The parties may agree upon the
compensation of debts which are not yet
done.
ART 1286
Compensation takes place by operation of
law, even though debt may be payable at
different places, but there shall be an
indemnity for expenses of exchange and
transportation to the place of payment.
Applies to legal compensation
The indemnity refers to:
Expenses of monetary exchange
Expenses of transportation
The indemnity shall be paid by the person
who raises the defense of compensation
Section 6
NOVATION
ART 1291
Obligations may be modified by:
(1) Changing their object or principal
income;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights
of the creditor.
Novation - total or partial extinction of an
obligation through the creation of new
one which substitutes it.

- contract containing two
stipulation: one to extinguish or modify an
existing obligation, the other to substitute
a new one in its place.
Kinds of Novation:
They are:
(1) According to origin
a. Legal operation of law
b. Conventional agreement of the parties
(2) According to how it is constituted
a. Express when declared in unequivocal terms
b. Implied old and new are essentially incompatible


(1) According to extent or effect
a. Total or extinctive old obligation is extinguished
b. Partial or modificatory old obligation is modified
(2) According to subject
a. Real or objective when the object(or cause) of the
obligation is changed
b. Personal or subjective when the person of the
debtor is substituted and/or a third a person is
subrogated in the rights of the creditor
c. Mixed when object and/or principal conditions of
the obligation and the debtor or the creditor, or both
parties, are changed.

ART. 1295
The insolvency of the new debtor, who has
been proposed by the original debtor and
accepted by the creditor, shall not revive
the action of the latter against the original
obligor, except when said insolvency was
already existing and of public knowledge,
or known to the debtor, when he
delegated his debt.
General rule: old debtor is not liable to
the creditor in case of the insolvency of
the new debtor
Exceptions:
(1) The said insolvency was already existing and
of public knowledge at time of the
delegacion
(2) The insolvency was already existing and
known to the debtor at the time of the
delegacion
ART. 1299
If the original obligation was subject to a
suspensive or resolutory condition, the
new obligation shall be under the same
condition, unless it is otherwise stipulated.
The first obligation is subject to a suspensive
or resolutory condition.
The second obligation is deemed subject to
the same condition unless the contrary is
stipulated by the parties in their contract.
ART. 1303
Subrogation transfer to the person
subrogated the credit with all the rights
thereto appertaining, either against the
debtor or against the third persons, be
they guarantors or possessors of
mortgages, subject to stipulation in a
conventional subrogation.
The effect of legal subrogation is to transfer to
the new creditor all the credit and all the
rights and actions that could have been
exercised by the former creditor against the
debtor or the third persons, be they
guarantors or mortgagers