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Compensation and Novation

The Law on Obligations and Contracts

Aleizer Yrrah Jasmin

on 4 February 2013

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Transcript of Compensation and Novation

Compensation & Novation simultaneous balancing of 2 obligations 100 80 20 1 person
1 obligation
impossible payment Compensation VS. Confusion 2 people
2 obligations
payment Kinds of Compensation Article 1278
Compensation shall take place when two persons, in their own right, are creditors and debtors of each other. Total Partial Legal Voluntary Judicial Facultative Same amount for both obligations Different amount for both obligations Takes place by operation of law Takes place by agreement Takes place by order from court on a litigation Can be set up by one party Effect or Extent Cause or Origin Article 1279
In order that compensation may be proper, it is necessary: 1.
Each one of the obligors be bound principally, and that he be at the same time a principal creditor to the other; 2.
Both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also the same quality of the latter has been stated; 3.
That the 2 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 Article 1280
Notwithstanding the provisions of the preceding article, the guarantor may set up compensation as regards what the creditor may owe the principal debtor 20 G as a guarantor Will be liable if not paid Requisites of Legal Compensation:
1. The parties are principal creditors and principal debtors of each other.
2. Both debts consist in a sum of money, or of consumable things of the same kind and quality.
3. The two debts are due and demandable.
4. The two debts are liquidated.5. No retention or controversy commenced by a third person. Article 1281
Compensation may be total or partial. When the two debts are of the same amount, there is a total compensation. Article 1283
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 500 300 Fails to
pay Gets mad
Damages 300 worth
Obligation to pay for damages Article 1284
When one or both debts are rescissible or voidable, they may be compensated against each other before they are judicially rescinded or avoided. Article 1285
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 did not consent thereto, the latter may set up the compensation of debts previous to the cession, but not 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. Article 1286
Compensation takes place by operation of law, even though the debts may be payable at different places, but there shall be an indemnity for expenses of exchange or transportation to the place of payment. $ 100 P 500 He who claims compensation
pays for exchange expense Article 1287
Compensation shall not be proper when one of the debts arises from a depositum or from the obligations of a depository 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. Article 1288
Neither shall there be compensation if one of the debts consist in civil liability arising from a penal offense.

Instances when legal compensation is not allowed by law.
1. Where one of the debts arises from a depositum.
2. Where one of the debts arises from a commodatum.
3. Where one of the debts arises from a claim for support due by gratuitous title. 20 20 Article 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. Article 1290
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 are debtors are not aware of the compensation.

Consent of parties not required in legal compensation. Compensation takes place automatically by mere operation Full legal capacity of parties not required substitute of an obligation 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 Kinds of novation Origin
conventional Constitution
implied Extent of Effect
total or extinctive
partial or modificatory Subject
real or objective
personal or subjective
mixed 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
A previous valid obligation
Capacity and intention of the parties to modify or extinguish the obligation
The modification or extinguishment of the obligation
The creation of a new valid obligation

Test of incompatibility between two obligations. 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 the articles 1236 and 1237. Substitution
Subrogation Expromission Delegacion 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. 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 insolcency was already existing and of public knowledge, or known to the debtor, when he delegated his debt Debtor substitution is possible Article 1296
When the principal obligation is extinguished in consequence of a novation, accessory obligations may subsist only insofar as they benefit third persons who did not give their consent.

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. 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. 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. Subrogation Conventional Legal Article 1301
Conventional subrogation of a third person requires the consent of the original parties and of the third person. Consent Requirement:
the debtor
the old creditor
the new creditor 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 expenses 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 the confusion as to the latter's share. Article 1303
Subrogation transfers to the person subrogated the credit with all the rights thereto appertaining, either against the debtor or against this persons, be they guarantors or possessors of mortgages, subject to stipulation in a conventional subrogation. 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. Article 1282
The parties may agree upon the compensation of debts which are not yet due. Where compensation has taken place before assignment. Where compensation has taken place after assignment.
a. With the consent of the debtor
b. With the knowledge but without the consent of the debtor
c. Without the knowledge of the debtor 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.
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