OBLIGATIONS

AND
CONTRACTS
Section 5. Compensation
ARTICLE 1278.
 Compensation shall take place when two persons, in their
own right are creditors and debtors of each other.
COMPENSATION
Is the extinguishment to the concurrent amount of
the debts of two persons who, in their own right, are
debtors and creditors of each other.
KINDS OF COMPENSATION
By its effect or extent
 Total- when both obligations are of the same amount
 Partial- when the two obligations are of different amounts.

by its cause or origin

 Legal- when it takes place by operation of law even without the knowledge of the parties.
 Voluntary- when it takes place by agreement of the parties
 Judicial- when it takes place by order from a court of litigation.
 Facultative- when it can be set up only by one of the parties.
ARTICLE 1279
 In order that compensation may be proper, it is necessary:
 (1) That each one of the obligors be bound principally and that he be at the
same time a principal creditor of the other;
 (2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if he
latter has been stated.
 (3) That the two 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 provision of the preceding article, the
guarantor may set up compensation as regards what the creditor
may owe the principal debtor.
 Article 1281.
 Compensation may be total or partial. When the two debts are of the same
amount, there is a total compensation.

 Article 1282.
 The parties may agree upon the compensation of debts which are not yet
due.
VOLUNTARY COMPENSATION
 This provision of law is an exception to the general rule that only
debts which are due and demandable can be compensated. (Art.
1279)