Section 5 - Compensation (Article 1278 - 1283) PDF

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SECTION 5. – COMPENSATIONArticle 1278Article 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each other. (1195)Meaning of compensationCompensation is the extinguishment to the concurrent amount of the debts of two persons who, in their own right...

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SECTION 5. – COMPENSATION

Article 1278 Article 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each other. (1195)

extinguishment by operation of law of concurring debts of two persons. Compensation is often called simplified payment because it provides a more convenient and less expensive effectuation of payments between two persons who are reciprocally creditors and debtors.

Artikulo 1278 Compensation and confusion distinguished Ang kabayaran ay mangyayari sa dalawang tao ayon sa kanilang mga karapatan kung sino ang nagpautang at sino ang umutang. Meaning of compensation 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. (Arts. 1278,1290) It involves the simultaneous balancing of two obligations in order to extinguish them to the extent in which the amount of one is covered by that of the other. (8 Manresa 201) EXAMPLE: A owes B the amount of ₱1,000.

The differences are: 1. In conclusion, there is only one person who is a creditor and debtor of himself, while in compensation, there are two persons involved, each of whom is a debtor and a creditor of the other; 2. In conclusion, there is but one obligation, while in compensation, there are two obligations; and 3. In conclusion, there is impossibility of payment, while in compensation, there is indirect payment. There may be compensation in joint and solidary obligations. (see Arts. 1207, 1208, 1215.)

B owes A the amount of ₱700. Both debts are due and payable today. Here, compensation takes place partially, that is, to the concurrent amount of ₱700. So, A shall be liable to be for only ₱300.

If the two debts are of the same amount, there is total compensation. (Art. 1281.) The two debts are extinguished without actual transfer of money between the parties.

Object of compensation The object of compensation is the prevention of unnecessary litigations and payments. This is accomplished through the mutual

Kinds of compensation 1. By its effect or extent: A. Total – when both obligations are of the same amount. B. Partial – when the two obligations are of different amounts and a balance remains. 2. By its cause or origin: A. Legal – when it takes place by operation of law even without the knowledge of the parties.

B. Voluntary – when it takes place by agreement of the parties. C. Judicial – when it takes place by order from a court in a litigation. D. Facultative – when it can be set up only by one of the parties. Definition of Terms  Concurrent – happening or existing at the same time.  Litigation – the process of taking a case to a court of law so that a judgment can be made.  Debtor – someone who owes money.  Creditor – someone who money is owed to.

(2) Kung ang parehong utang ay binubuo ng kabuuan ng pera, o ang bagay na dapat ibigay ay inilaan upang gamitin, na pareho sila ng uri, at pareho rin sila ng kalidad kung ang nahuli ay nakasaad; (3) Kung ang dalawang utang ay dapat nang bayaran; (4) Na ito ay liquidated at hinihingi; (5) Na wala sinuman sa mga ito mayroong anumang mga pagpapanatili o kontrobersya, na nagsimula sa pamamagitan ng ikatlong tao at nakipag-ugnayan sa angkop na panahon sa may utang. Requisites of legal compensation Article 1270 enumerates the requirements or requisites for legal compensation.

Article 1279 ART. 1279. In order that compensation may be proper, it is necessary:

1. The parties are principal creditors and principal debtors of each other. –

(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;

EXAMPLE:

(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 the latter has been stated;

A. Katherine owes Charlene ₱1,000. Charlene owes Katherine ₱1,000. Compensation will take place because Katherine and Charlene are principal debtors and creditors of each other.

and

B. John owes Eunice with Camil as guarantor. Eunice owes Camil ₱1,000.

(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor. (1196)

There will be no compensation between Eunice and Camil because while Eunice is principally liable to Camil, Camil is merely subsidiarily liable to Eunice. Hence, Camil can demand payment from Eunice.

(3) That the two debts be due; (4) That demandable;

they

be

liquidated

Artikulo 1279 Para ang kompensasyon ay nararapat, dapat ito ay: (1) Bawat isa sa mga may utang ay obligado principally, at na siya rin ang

C. Jenessa owes Andrea ₱1,000. Andrea owes Jenessa ₱1,000, the latter as guardian or administrator.

There will be no compensation. In this case, Jenessa is personally liable to Andrea, while Andrea is not principally liable to Jenessa. The real creditor of Andrea is the ward under guardianship or the estate under administration. Jenessa is creditor of Andrea in a representative capacity.

No compensation will take place. (see Arts. 1244, 1246.)

D. Sam owes Aye, Roanne, and Jamie (partners in partnership = P) ₱1,000. P owes Sam ₱ 1,000.

Compensation will not also take place because the things due are not of the same kind. Neither will there be compensation if the obligation of A is to deliver 10 sacks of macan rice, while that of B is to deliver 10 sacks of wagwag rice.

Sam cannot set up compensation because Aye, Roanne, and Jamie, are not principally liable to Sam. (see Escaño vs. Heirs of Escaño, 28 Phil. 73.)

B. A obliged himself to deliver to B 10 sacks of rice while B obliged himself to deliver to A 10 sacks of corn.

C. A owes B 10 sacks of wagwag rice. B owes A any 10 sacks of rice;

E. A (stockholder) owes B (corporation) for amounts A collected as treasurer of B. B owes A amount representing overpayment by A of his stocks.

There can be no legal compensation in this case because of the lack of identity of the kind and quality of the rice due.

Compensation was held proper as A and B are mutually debtors and creditors of each other. (Brimo vs. Goldemberg & Co., Inc., 69 Phil. 502.)

Compensation can be claimed by B since he can deliver any kind of rice. It would be the same as if B received 10 sacks of wagwag rice from A and the returned the same to A in payment of his debt.

F. Kim owes Kalid ₱ 1,000 in the latter’s capacity as administrator of his father’s estate. Kalid owes Kim representing debt of Kalid’s father. Compensation was held proper because the credit of Kim is chargeable against the estate under Kalid’s administration. (Dela Peña vs. Hidalgo, 20 Phil. 323.)

2. Both debts consist in a sum of money, or of consumable things of the same kind and quality. – EXAMPLE: A. Patrick owes Spongebob ₱1,000. Spongebob owes Patrick an electric range worth ₱1,000.

But A cannot set up compensation if opposed by B. This is an example of facultive compensation. (see Arts. 1287, 1288) D. Marcel owes Cyrelle a specific horse. Cyrelle owes specific horse.

Marcel

another’s

Compensation cannot be set up by Marcel and Cyrelle (see Art. 1244) unless both agree. (Art. 1282.) E. Sandy owes Krab any horse. Krab owes Sandy any horse. Compensation will take place in this case, although the things due are not consumable since the things due are of the same kind. As to their quality, Article 1246 governs.

F. Ben owes Gwen ₱5,000. Gwen owes Ben ₱5,000 or a cow. There can be no legal compensation because Gwen prefer to deliver a cow. But if the right of choice belongs to Ben, compensation will take place. 3. The two debts are due or demandable. – EXAMPLE: Zoe owes Joshua ₱ 1,000 due today. Joshua owes Zoe ₱1,00 due next month. Compensation cannot take place as the debts are not due on the same date. However, if Zoe has not yet paid Joshua on the date that the obligation of Joshua becomes due, there will be compensation on that date. If the debt of Joshua is subject to a suspensive condition which has not yet happened, there can also be no compensation.

4. The two debts are liquidated. –

1288.) Of course, compensation will not take place where is their waiver. There is said to be a retention when the credit of one of the parties is subject to the satisfaction of the claims of the third person, while a controversy exists when a third person claims he is the creditor of one of the parties.

EXAMPLE: A owes B ₱10,000 B owes A ₱10,000 B also owes C ₱10,00 C causes the garnishment of the credit of B against A and notifies A not to pay B ₱10,000 as C has a better right to the said amount. B may not owe C but the latter claims that he and not B is the creditor of A. In this case, compensation cannot take place between A and B in view of controversy commenced by C, a third person. In a meantime, the compensation is suspended. If C loses the case, compensation shall be deemed to have taken place as of the date the requisites for legal compensation concurred.

EXAMPLE: Eric owes Ariel ₱1,000. Ariel owes Eric the share of the latter in a business the amount of which is still to be ascertained. Compensation will not take place as the debt of Ariel is not liquidated. If part of the debt of Ariel has been liquidated, compensation takes place with respect to that part without waiting for the liquidation of the rest. (see. Art 1248.) 5. No retention or controversy commenced by a third person. – This is negative requisite for legal compensation. The other such requisites is that the compensation is not prohibited by law. (Arts. 1287,

Article 1280 ART. 1280. Notwithstanding the provisions of the preceding article, the guarantor may set up compensation as regards what the creditor may owe the principal debtor. (1197) Artikulo 1280 Sa kabila ng mga probisyon ng naunang artikulo, ang tagapanagot ay maaaring magayos ng kabayaran sa kung ano ang maaaring ipagkaloob ng pinagkakautangan sa pangunahing may utang. Compensation benefits guarantor

This article is an exception to the general rule that only principal debtor can set up against his creditor what the latter owes him.

are of different amounts, compensation is total as regards the smaller debt, and partial only with respect to the larger debt. (supra.)

Although the guarantor is only subsidiarily, not principally bound, he is given the right to set up compensation. The reason is that the extinguishment of the principal obligation as a consequence of compensation carries with it the accessory obligations such as guaranty. (see Arts. 1230, 1273, 1276, 1296.)

EXAMPLE: A owes B the amount ₱1,000. B owes A the amount ₱1,000. If two debts are of the same amount, there is total compensation A owes B amount ₱1,000.

EXAMPLE: A owes B ₱1,000 with G as guarantor. B owes A ₱1,000. The obligation of guaranty is extinguished by the compensation, but if the compensation is partial, G will be liable for the balance. Definition of Terms  Guarantor – a person or organization

that promises to pay back a loan/borrowed money if the person or organization that borrowed cannot pay it

B owes A amount ₱700. If two debts are unequal, the one who’s lacking shall be liable for the unsettled debt.

Article 1282 ART. 1282. The parties may agree upon the compensation of debts which are not yet due. (n) Artikulo 1282 Ang magkabilang partido ay maaring mamayagan sa pagbayad ng utang na wala pa sa panahon ang singilan.

Article 1281

Voluntary compensation

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

This provision of law is an exception to the general rule that only debts which are due and demandable can be compensated. (Art. 1279[3, 4].)

Artikulo 1281 Ang kabayaran ay maaaring buo o bahagya. Kapag ang dalawang utang ay pareho ng halaga, ang kabayaran ay buo.

The kind of compensation has no special requisites. It is sufficient that the contract of the parties, which declares the compensation is valid. (Art. 1306.) ILLUSTRATION:

Total and partial compensations Total or partial compensation applies to all the different kinds of compensation. (see example under Article 278.) Total compensation results when the two debts are of the same amount. (Art. 1281.) If they

Vic bought grocery items worth P30,000 from Aling Puring store under a line of credit, with a maturity date of three months. Just after two months, both Vic and Aling Puring agreed to settle the obligation.

Article 1283 ART. 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)

Artikulo 1282 Kung ang isa sa ang mga partido sa isang suit sa isang obligasyong ay may karapatan para sa mga pinsala laban sa isa, ang nauna ay maaaring ipawalang bisa ito sa pamamagitan ng pagpapatunay ng kanyang karapatan sa nasabing mga pinsala at ang halaga hinggil doon.

References: 

Ongkeko, P. (Ed.). (2016 March 25). Article 1281. Retrieved from https://lspuoblicon2015.wordpress.com/2 016/03/25/article-1281/



Oblicon 2017. Section 5 – Compensation. Article 1280. (2017 April 24). Retrieved from https://lspuoblicon2017blog.wordpress.c om/2017/04/24/article-1280/



Dizon, Z. (2017 April 24). OBLICON 2017. SECTION 5 – COMPENSATION. ARTICLE 1281. Retrieved from https://lspuoblicon2017blog.wordpress.c om/2017/04/24/article-1281-1282/



Oblicon 2017. Section 5 – Compensation. Article 1279. (2017 April 24). Retrieved from https://lspuoblicon2017blog.wordpress.c om/2017/04/24/article-1279/



Concurrent. (n.d.) In Cambridge Dictionary. Retrieved from https://dictionary.cambridge.org/us/dictio nary/english/concurrent



Litigation. (n.d.) In Cambridge Dictionary. Retrieved from https://dictionary.cambridge.org/us/dictio nary/english/litigation



Creditor. (n.d.) In Cambridge Dictionary. Retrieved from https://dictionary.cambridge.org/us/dictio nary/english/creditor



Debtor. (n.d.) In Cambridge Dictionary. Retrieved from https://dictionary.cambridge.org/us/dictio nary/english/debtor

Judicial compensation Compensation may also take place when so declared by a final judgment of a court in a suit. A party may set off his claim for damages against his obligation to the other party by proving his right to said damages and the amount thereof. EXAMPLE: Christina owes Lorraine ₱1,000. When Lorraine demanded payment, Christina failed to pay. In anger, Lorraine damaged the property of Christina to the extent of ₱800. Christina can set off the obligation of Lorraine to pay her damages in the amount of ₱800 against her debt of ₱1,000. References: 





Callagan-Aquino, L. (n.d.) Philippine Law on Obligations and Contracts. Retrieved from https://jurisdoctor1a.wordpress.com/ Villanueva, R., Calventas, J., Aquino, J., Capio, K. (Eds.). (2019 April 03). SECTION 5. COMPENSATION. Retrieved from https://jurisdoctor1a.wordpress.com/2019 /04/03/section-5-compensation/ Pineda E (n d ) Obligations and...