I.

DEFINITIONS
Define or give the meaning of the ff:
1. Compensation – the extinguishment to the concurrent amount of the debts of two
persons, who in their own right, are debtors and creditors of each other.
2. Legal compensation – when it takes place by operation of law even without the
knowledge of the parties.
3. Facultative compensation – when it can be set up only by one of the parties.
II. DISCUSSIONS
1. What are the distinctions between confusion and compensation as modes for
extinguishing an obligation?
Answer: According to Art. 1278, there is compensation when two persons are
creditors and debtors of each other. Confusion occurs when one person is his
own creditor and debtor.
2. In what way is compensation similar to payment?
Answer: According to Art. 1289, compensation and payment is similar in way due
to the fact that application of payments can be applied to compensation.

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3. May there be compensation although the things due are not consumable?

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Explain.

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Answer: According to Art. 1279, there will be no compensation if both debts are

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not in the form of sums of money or consumable things of the same kind and

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quality.

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4. When may compensation take place when only of the debts is due?
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Answer: According to Art.1279, compensation may take place when A has not yet
paid B on the date that B’s obligation is due.
III. PROBLEMS
Explain or state briefly the rule or reason for your answer.
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1. D borrowed P50,000 as character loan (no security) from a bank. Despite

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demands for payment after the loan fell due, D did not pay the bank. D has a
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savings deposit of P40,000 with the bank. Has the bank the right to apply the
deposit to the payment of D’s debt?
Answer: Yes. According to Art. 1287, since the other party is a bank deposit, it
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may apply the deposit to the payment of D’s debt.

2. D owes C P10,000 payable on November 20, C owes D P10,000 on October 20.
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Can compensation also take place although the debts are not payable on the
same date?
3. Illustrate compensation which can be set up only by one of the parties.
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4. After contracting a debt in the amount of P10,000 in favor of C, D succeeded

through fraudulent means to make C liable to him in the same amount. Assuming
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that both obligations are now due, may the two debts be compensated against
each other? What is the effect if the debt of C is later annulled in court at the
instance of D?
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