EXTINGUISHMENT OF OBLIGATION

BY

NOVATION
Novation
• Substitution or alteration of an obligation by a
subsequent one that cancels or modifies the
preceding one.
• A judicial act of dual function, in that at the
time it extinguishes an obligation, it creates a
new one in lieu of the old.
Article 1291
• Obligations may be modified by: (1) Changing
their object or principal conditions; (2)
Substituting the person of the debtor; (3)
Subrogating a third person in the rights of the
creditor.
Changing their object or principal conditions.
• Example. S agreed to deliver to B a car later; they
entered into another contract whereby, instead of S
delivering a car, he would deliver ten air
conditioners.
• The obligation to deliver the car is extinguished by
the obligation to deliver the ten air conditioners. The
change may involve the principal terms of the
obligation
Substituting the person of the debtor.
• Example .If after the constitution of the obligation,
both parties agreed that C will substitute fo S or that
D will be subrogated in the rights of B, there is a
personal novation.
• In this case, C becomes the new debtor, or D the new
creditor, as the case may be.
Subrogating a third person in the rights of the
creditor.
• Example. If the agreement of the parties is that S will
deliver to D the ten air conditioners, instead of S
delivering a car to B.
• Then there is a mixed novation because the object of
the obligation and the person of the creditor are
changed.
Kinds of novation
According to origin
Legal — that which takes place by operation of law
Conventional — that which takes place by agreement of
the parties
According to how it is constituted:
Express — when it is so declared in unequivocal terms
Implied — when there is such incompatibility between
the old and the new obligation that cannot stand
together.
According to extent or effect
Total or extinctive — when the old obligation is completely
extinguished
Partial or modificatory — when the old obligation is merely
modified, i.e., the change is merely incidental to the main
obligation.

According to the subject:

Real or objective. — when there is a change in the obligation
itself either as to its cause, object or principal conditions.
Personal or subjective. — when the person of the debtor is
substituted and/or when a third person is subrogated in the
rights of the creditor
Mixed. — when the object or principal condition of the
obligation and the debtor or the creditor or both the parties,
are changed. It is a combination of real and personal novation.
Article 1292
• In order that an obligation may be
extinguished by another which substitutes the
same, it is imperative that it be so declared in
unequivocal terms, or that the old and the
new obligations be on every point
incompatible with each other.
Requisites of novation
1. The existence of a previous valid obligation
2. The intention or agreement and capacity of the
parties to extinguish or modify the obligation
3. The extinguishment or modification of the obligation
4. The creation or birth of a valid new obligation.
• Example. S agreed to deliver to B a car on
November 10. Subsequently, a second agreement
was entered into whereby S would deliver a truck
on November 10. Is there a Novation?

• There is no novation because it is not so declared

expressly by the parties on their second
agreement, and the two obligations are not
incompatible with each other because each can
stand separately.
• Example. Suppose the obligation of S is to
construct a house on a certain parcel of land . S
agreed to construct an apartment on the same
parcel of land . The area of the land is such that
both the house and the apartment as per the
building plans cannot be constructed on the same
site.

• So in this case there is novation even in the

absence of an express agreement to that affect
because the two obligations are absolutely
incompatible with each other.
Article 1293
• Novation which consists in substituting a new
debtor in the place of the original one, may be
made even without the knowledge or against
the will of the latter, but not without the
consent of the creditor. Payment by the new
debtor gives him the rights mentioned in
Articles 1236 and 1237.
Kinds of substitution.
• Expromision or that which takes place when a
third person of his own initiative and without
the knowledge or against the will of the
original debtor assumes the latter’s obligation
with the consent of the creditor.
• Delegacion or that which takes place when the
creditor accepts a third person to take the
place of the debtor at the instance of the
latter.
• Example. D (debtor) tells C (creditor) that T
will pay D’s debt. C agrees.
• It does not necessarily means that there is
delegacion here. But if D tells C that T will pay
his debt and he asks C to release him from his
obligation, to which C agrees, delegacion
results.
• Example. Suppose , in the same example, it is
T who approaches C and tells him that T will
pay the debt of D.C agrees.
• In this case there is no expromision, unless
there is an agreement that D shall be released
from his obligation to C.
Article 1294
• If the substitution is without the knowledge or
against the will of the debtor, the new
debtor’s insolvency or non-fulfillment of the
obligation shall not give rise to any liability on
the part of the original debtor.
• Example. In expromision, the new debtors
insolvency or nonfulfilment of the obligation
will not revive the action of creditor against
the old debtor whose obligation is
extinguished by the assumption of the debt by
the new debtor.

• Example. In the second example above, if

there is expromision, D will no longer be liable
to C in case of insolvency of T or non-
fulfillment by T of his obligation.
Article 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.
• Example. D owes C P1,000.00. D proposed to C that
T would substitute him as debtor. C agreed to the
proposal.

• If at the time of the delegacion, T was already

insolvent but his insolvency was neither of public
knowledge nor known to D, then D is liable. Neither
is D liable if the insolvency of T took place after he
delegated his debt.

• It is believed that D is also not liable if C had

knowledge that t was Insolvent at the time thw
debt was delegated to him.
Article 1296
• When the principal obligation is extinguished
in consequence of a novation, accessory
obligations may subsist only insofar as they
may benefit third persons who did not give
their consent.
Effects of Novation on Accessory Obligation
• If the principal obligation extinguished
accessory obligation is also extinguished.
• Extinguishment of the principal obligation
releases all pledges or mortgages as well as
guarantors are sureties, unless they agree to
bound in the new obligation.
• Also the obligation to pay interest.
• Example. A owes B P2,000 with interest at 14%, B
owes C P280.00. It was agreed among the parties
that A would pay the interest of P280.00 to C. In
this case, besides the principal obligation of A,
there is a stipulation in favor of C, a third person.
Later on, A and B executed another contact
whereby they agreed that A would deliver to B a
television set in payment of the loan.

• In spite of the novation, the accessory obligation

to pay the interest of P280.00 to C will subsists
unless C gives his consent to the novation.
Article 1297
• If the new obligation is void, the original one
shall subsist, unless the parties intended that
the former relation should be extinguished in
any event.
• Effect where the new obligation void
– The general rule is that there is no novation if the
new obligation is void and, therefore, the original
one shall subsist for the reason that the second
obligation being inexistent, it cannot extinguish or
modify the first.

• Effect where the new obligation voidable

– If the new obligation is only voidable, novation
can take place. But the moment it is annulled, the
novation must be considered as not having taken
place, and the original one can be enforced,
unless the intention of the parties is otherwise.
Article 1298
• The novation is void if the original obligation
was void, except when annulment may be
claimed only by the debtor, or when
ratification validates acts which are voidable.
• Effect where the old obligation void or
voidable
– This article has its basis also on the requisites of a
valid novation. A void obligation cannot be
novated because there is nothing to novate.
However, if the original obligation is only or if the
voidable obligation is validated by ratification, the
novation is valid.
• Example S agreed to deliver prohibited drugs
to B. Later on, it was agreed that S would pay
B P100,000.00 instead of delivering the drugs.

• In this case the novation is void because the

original obligation is void.
• Example Suppose S was induced fraud
committed by B to sign a contact whereby S
obliged himself to deliver a car to B.
Subsequently, it was agreed between S and B
that S would give B P100,000.00 instead of the
car.
• The original obligation of S is voidable. As it
has not yet been annulled at the instance of S
the second contract is valid.
Article 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.
• Presumption where original obligation subject
to a condition
– If 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.
Article 1300
• Subrogation of a third person in the rights of
the creditor is either legal or conventional.
The former is not presumed, except in cases
expressly mentioned in this Code; the latter
must be clearly established in order that it
may take effect.
• Subrogation
– Transfer of all the rights of the creditor to a third
person, who thereby acquires all his rights against
the debtor or against third persons.
• Legal Subrogation – takes place by operation of
law.
• Conventional Subrogation - takes place by express
agreement of the original parties (the debtor and
the original creditor) and the third person (the new
creditor)
Article 1301
• Conventional subrogation of a third person
requires the consent of the original parties
and of the third person.
Consent of all parties required in conventional
subrogation.
• In conventional subrogation, the consent of all
the parties is an essential requirement the
debtor, he becomes liable under the new
obligation to a new creditor. The old or
original creditor his right against the debtor is
extinguished and the new creditor may dislike
or distrust the debtor.
Article 1302
• It is presumed that there is legal subrogation:
(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
Legal Subrogation is not presumed except in the cases
expressly mentioned by law.
1. When a creditor pays another creditor who is
preferred.

• Example. A owes B P1,000.00 secured by a first

mortgage on the land of A. A also owes C P2,000.00.
This debt is unsecured (or secured by a second
mortgage).

• Under the law, B, who is a preferred creditor, has

preference to payment with respect to the land as
against C who is merely an ordinary creditor. If C pays
the debt of A to B, C will be subrogated in B’s right so
that he can have the mortgage foreclosed in case A
fails to pay the P1,000.00 debt
2. When a third person without interest in the
obligation pays with the approval of the debtor
—
Example. A owes B P1,000.00. C pays B with the
express or implied consent of A.

In this case, C will be subrogated in the rights of

B.
3. When a third person with interest in the obligation
pays even without the knowledge of the debtor.

• Example. Suppose in the same example, C is the

guarantor of A. C is a person interested in the
fulfillment of the obligation of A as he would be
benefited by its extinguishment.

• If C pays B even without the knowledge of A, C is

subrogated in the rights of B. Confusion takes place in
the person of C. Hence, the guaranty is extinguished
but the principal obligation still subsists.
Article 1303
• Subrogation transfers to the person
subrogated the credit with all the rights
thereto appertaining, either against the
debtor or against third persons, be they
guarantors or possessors of mortgages,
subject to stipulation in a conventional
subrogation.
• Effect of legal subrogation.
The effect of legal subrogation is to
transfer to the new creditor the credit and all
the rights and actions that could have been
exercised by the former creditor either against
the debtor or against third persons, be they
guarantors3 or mortgagors.
Article 1304
• A creditor, to whom partial payment has been
made, may exercise his right for the
remainder, and he shall be preferred to the
person who has been subrogated in his place
in virtue of the partial payment of the same
credit.
Effect of partial subrogation.
• The creditor to whom partial payment has
been made by the new creditor remains a
creditor to the extent of the balance of the
debt.
• Example. D is indebted to C for P10,000.00. X
pays C P6,000.00 with the consent of D. There
is here partial subrogation as to the amount of
P6,000.00. D remains the creditor with respect
to the balance of P4,000.00.
• Thus, two credits subsist. In case of insolvency
of D, C is preferred to X, that is, he shall be
paid from the assets of A ahead of X.