Article 1286 Article 1287 uses the word depositum instead of “deposit” which is used for

an ordinary bank deposit. A bank deposit is not a depositum as defined above. It

Compensation takes place by operation of law, even though the debts may be
is really a loan which creates the relationship of debtor and creditor. As a general
payable at different places, but there shall be an indemnity for expenses of
rule, a bank has a right of set-off of the deposits in its hands for the payment of
exchange or transportation to the place of payment.
any indebtedness to it on the part of a depositor. Similarly, a depositor has every
Compensation where debts payable at different places. right to set-off his money deposit with a bank against the loans he had obtained
from said bank.
This article applies to legal compensation. The indemnity contemplated
above does not refer to the difference in the value of the things in their 2) Where one of the debts arises from a commodatum. - Commodatum is a
respective places but to the expenses of monetary exchange (in case of money gratuitous contract whereby one of the parties delivers to another
debts) and expenses of transportation (in case of things to be delivered). Once something not consumable so that the latter may use the same for a certain
these expenses are liquidated, the debts also become compensable. The time and return it.
indemnity shall be paid by the person who raises the defense of compensation. 3) Where one of the debts arises from a claim for support due by gratuitous
title. - “Support comprises everything that is indispensable for sustenance,
Foreign exchange has been defined as the conversion of an amount of dwelling, clothing, medical attendance, education and transportation, in
money or currency of one country into an equivalent amount of money or keeping with the financial capacity of the family.
currency of another. 4) Where one of the debts consists in civil liability arising from a penal
offense. - “If one of the debts consists in civil liability arising from a criminal
Article 1287
offense, compensation would be improper and inadvisable because the
Compensation shall not be proper when one of the debts arises from a satisfaction of such obligation is imperative.”
depositum or from the obligations of a depositary or of a bailee in commodatum.
Article 1289
Neither can compensation be set up against a creditor who has a claim for
If a person should have against him several debts which are susceptible
support due by gratuitous title, without prejudice to the provisions of paragraph
of compensation, the rules on the application of payments shall apply to the
2 of Article 301.
order of the compensation.
Article 1288
Rules on application of payments applicable to order of compensation.
Neither shall there be compensation if one of the debts consists in civil
Compensation is similar to payment. If a debtor has various debts which
liability arising from a penal offense.
are susceptible of compensation, he must inform the creditor which of them shall
Instances when legal compensation not allowed by law. be the object of compensation. In case he fails to do so, then the compensation
shall be applied to the most onerous obligation.
1) Where one of the debts arises from a depositum. - A deposit is constituted
from the moment a person receives a thing belonging to another with the Article 1290
obligation of safely keeping it and of returning the same.
 When all the requisites mentioned in Article 1279 are present, 3) Subrogating a third person in the rights of the creditor.
compensation takes effect by operation of law, and extinguishes both debts to
Meaning of novation.
the concurrent amount, even though the creditors and debtors are not aware of
the compensation. Novation is the total or partial extinction of an obligation through the creation of
a new one which substitutes it.
Consent of parties not required in legal compensation.
It is the substitution or change of an obligation by another, which extinguishes or
1) Compensation occurs automatically by mere operation of law. - From the
modifies the first, either by changing its object or principal conditions, by or
moment all the requisites mentioned in Article 1279 concur, legal
substituting another in place of the debtor, or by subrogating a third person in
compensation takes place automatically even in the absence of agreement
the rights of the creditor.
between the parties and even against their will, and extinguishes reciprocally
both debts as soon as they exist simultaneously, to the amount of their Dual function or purpose of novation.
respective sums. It takes place ipso jure from the day all the necessary
requisites concur, without need of any conscious intent on the part of the Novation is a contract containing two stipulations: one to extinguish or modify an
parties and even without their knowledge, at the time of the co-existence of existing obligation, and the other to substitute a new one in its place. Unlike
such cross debts. other modes of extinction of obligation, novation is a juridical act with a dual
2) Full legal capacity of parties not required. - As it takes place by mere function.
operation of law, and without any act of the parties, it is not required that
It does not operate as an absolute extinction in the sense that it ends with the
the parties have full legal capacity to give or to receive, as the case may be.
extinguishment of an obligation but only as a relative extinction because it
On the other hand, in order that there may be a valid payment, the parties
creates a new one in place of the old which is thus only “modified.”
must have the free disposal of the thing due and capacity to alienate it and
to receive payment, as the case may be. 1) The novation is extinctive when an old obligation is terminated by the
creation of a new obligation that takes the place of the former because of
Compensation, a matter of defense.
the total incompatibility between the two obligations. An extinctive novation
Although compensation is produced by operation of law, it is usually would thus have the twin effects of first, extinguishing an existing obligation
necessary to set it up a defense in an action demanding performance. Once and second, creating a new one in its stead. It does not necessarily imply
proved, its effects retroact or relate back to the very day on which all the that the new agreement should be complete in itself. Certain terms and
requisites mentioned by law concurred or are fulfilled. conditions may be carried, expressly or by implication, over to the new
obligation.
SECTION 6. — Novation 2) Where the change is not extinctive but is merely modificatory, i.e., incidental
Article 1291 to the main obligation (e.g., change in interest rates or an extension of time
Obligations may be modified by: to pay), the new agreement will not have the effect of extinguishing the fi rst
but would merely supplement it or supplant some but not all of its
1) Changing their object or principal conditions;
provisions. In other words, the old obligation subsists to the extent it
2) Substituting the person of the debtor;
remains compatible with the amendatory agreement.
 In order that an obligation may be extinguished by another which substitutes the
Whether the effect is extinctive or merely modificatory, is dependent on the same, it is imperative that it be so declared in unequivocal terms, or that the old
nature of the change and the intention of the parties. In either case, and the new obligations be on every point incompatible with each other.
novation is made as provided in Article 1291.
Requisites of novation.
Kinds of novation.
In novation, there are four (4) essential requisites, namely:
They are:
1) The existence of a previous valid obligation;
1) According to origin: 2) The intention or agreement and capacity of the parties to extinguish or
a) Legal. — that which takes place by operation of law modify the obligation;
b) Conventional. — that which takes place by agreement of the 3) The extinguishment or modification of the obligation; and
parties. 4) The creation or birth of a valid new obligation.
2) According to how it is constituted:
There can be no novation unless two distinct and successive binding contracts
a) Express. — when it is so declared in unequivocal terms
take place, between the same parties with the second designed to replace the
b) Implied. — when the old and the new obligations are essentially
preceding convention. Modifications introduced before a bargain becomes
incompatible with each other.
obligatory can in no sense constitute novation in law. A loan application, before
3) According to extent or effect:
bank approval, cannot be subsequently novated because the first requisite, a
a) Total or extinctive. — when the old obligation is completely
pre-existing obligation, is lacking.
extinguished; or
b) Partial or modificatory. — when the old obligation is merely Where the parties involved are corporations, it must first be proved that the
modified, i.e., the change is merely incidental to the main second contract was executed by persons possessing the proper authority to
obligation. bind their respective principals.
4) According to the subject:
a) Real or objective. — when the object (or cause) or principal Novation of judgment.
conditions of the obligation are changed.
A final judgment of a court that had been executed but not yet fully satisfied,
b) Personal or subjective. — when the person of the debtor is
may be novated by compromise. In such case, the judgment cannot subsequently
substituted and/or when a third person is subrogated in the rights
be executed because the agreement supersedes the judgment. The novation of a
of the creditor
contract or judgment may be subject to a suspensive condition.
c) Mixed. — when the object or principal condition of the obligation
and the debtor or the creditor or both the parties, arechanged. It is Novation with respect to criminal liability.
a combination of real and personal novations.
Novation is not a mode of extinguishing criminal liability. It may prevent the rise
of criminal liability as long as it occurs prior to the filing of the criminal
Article 1292
information in court. In other words, novation does not extinguish criminal
liability but may only prevent its rise.

In a case, a new agreement was reached by the parties to pay in cash the value of
goods delivered, for which a check was issued and subsequently dishonored. The
supposed agreement never took effect as petitioner never complied with his
undertaking. It was held that the novation theory does not apply where the offer
to pay by the debtor, and accepted by the creditor, turns out to be merely an
empty promise. In this case, the empty promise only delayed the fi ling of a use
for violation of B.P. Blg. 22 against petitioner.