Chapter 4 (Section 5)

STUDY GUIDE

I. Definition
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.
II. Discussions
1. What are the distinctions between confusion and compensation as modes for
extinguishing as obligation?
- According to Article 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?
- According to Article 1289, compensation and payment is similar in way due
to the fact that application of payments can be applied to compensation.
3. May there be compensation although the things due are not consumable? Explain.
- According to Art. 1279, there will be no compensation if both debts are not in
the form of sums of money or consumable things of the same kind and
quality.
4. When may compensation take place when only one of the debts is due?
- According to Article 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.
1. D borrowed P50,000 as character loan (no security) from a bank. Despite
demands for payment after the loan fell due, D did not pay the bank. D has a
 savings deposit of P40,000 with a bank. Has the bank the right to apply the
deposit to the payment of D’s debt?
- Yes. According to Article 1287, since the other party is a bank deposit, it may
apply the deposit to the payment of D’s debt.
2. D owes C P10,000 payable on November 20. C owes D P10,0000 payable on
October 20. Can compensation also take place although debts are not payable on
the same date?
- No. Through set-off, two parties with mutual rights and liabilities may replace
gross positions with net positions. It permits the rights to be discharged
because these are cross claims; A pays B and B pays A the same amount. Here
D crosses off C's debt and C also crosses off D's debt and they start again at 0
because they owed each other the same amount.
3. Illustrate compensation which can be set up only by one of the parties.
- D owes E P69,000. E stole the laptop of D worth P69,000. Here,
compensation by E is not proper. But D, the offended party, can claim the
right of compensation.
4. After contracting the 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
that both obligations are now due, may the two debts be compensated against each
other? What is the effect is the debt of C is later annulled in court at the instance
of D?
- Yes. If the both obligations are now due, the two debts may be compensated
against each other. However, if the debt of C is later annulled by the court at
the instance of D, compensation is still allowed to prevent unfairness. Under
Article 1284 of the Civil Code, when one or both debts are rescissible or
voidable, they may be compensated against each other before they are
judicially rescinded or avoided. Rescissible or voidable debts are still valid
until they are rescinded or voided. Thus, compensation is allowed.