Compensation

SECTION 5
ArtIcle1278
Compensation shall take place when two persons, in
their own right, are creditors and debtors of each
other. (1195)
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.

It is often called simplified payment.

ompensation and Confusion
Confusion Compensation
One person Two persons
One obligation Two Obligation

Payment
Takes effect by act of the parties
the parties must have the free disposal
of the thing due and capacity to
alienate
it is necessary that it be
complete
Compensation
Takes effect by operation of law
It is not required that the parties have the
capacity to give or to receive, as the case
may be
The law permits partial extinguishment of the
obligation
Kinds of compensation
(1) By its effect or extent
(a) Total
(b) Partial
(2) By its cause or origin
(a) Legal
(b) Voluntary
(c) Judicial
(d) Facultative
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 creditors of the other;
(2) That both debts consists in a sum of money, or if the things due are
consumable, they be of the same kinds, and also of the same quality
if the 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. (1996)
 Requisites of the legal
Compensation
1. The parties are principal creditors and principal debtors of each
other.
2. Both debts consists in a sum of money, or of consumable things
of the same kind and quality.
3. The two debts are due or demandable
4. The two debts are liquidated
5. No retention or controversy commenced by a third person.
ArtIcle 12
Ar t i c l e 1280

Notwithstanding the provisions of the preceding

8 0guarantor may set up compensation as
article, the
regards what the creditor may owe the principal
debtor. (1197)

Compensation benefits guarantor.

ArtIcle 1281
Compensation may be total or partial. When the
two debts are of the same amount, there is total
compensation. (n)

Total and partial compensations.

Article 1 2 8 2

The parties may agree upon the compensation of

debts which are not yet due. (n)

Voluntary 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. (n)

Judicial compensation.
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. (n)

Compensation of rescissible or voidable debts.

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 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. (1198a)

If the creditor communicated the cession to him but the debtor

did not consent thereto, the latter may set up the
compensation of debts previous to the cession, but not of
subsequent ones.
 • Where compensation has taken place before
assignment.

Where compensation has taken place after assignment.

(1) Assignment with the consent of debtor.

(2) Assignment with the knowledge but without the
consent of debtor.
(3) Assignment without the knowledge of the debtor.
 A r t i c l
Article 1286e 1 2 8 6
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 pr
transportation to the place of payment. (1199a)

Compensation where debts payable at different

places
 Article 1 2 8 7
Compensation shall not be proper when one of the
debts arises from a depositum or from obligations of a
depositary 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 article 301. (1200a)

Article 1 2 8 8
Neither shall there be compensation if one of the debts
consists in civil liability arising from a penal offense. (n)
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.
(4) Where one of the debts consists in civil liability arising
from penal offense.
 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.
(1201)

Rules of application of payments apply to order to

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,
event though the creditors and debtors are not aware of
the compensation. (1202a)

Consent of parties not required in legal compensation.

(1) Compensation takes place automatically by mere

operation of law.
(2) Full legal capacity of parties not required.