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Compensation
Chapter 4: Section 5 - Compensation

I.

Definitions
1. Compensation - It is a mode of extinguishing the obligation to the
concurrent amount, the obligations of those persons who in their own
right are reciprocally debtors and creditors of each other.
2. Legal Compensation - Takes place by operation of law because all the
requisites are present.
3. Facultative Compensation - When it can be claimed by one of the
parties who, however, has the right to object to it, such as when one of
the obligations has a period for the benefit of one party alone and who
renounces that period so as to make the obligation due

II.

Discussions
1. Distinction between confusion and compensation as modes of
extinguishing obligations.
Ans.

2. In what way is compensation similar to payment?

Ans.
If a person should have against him several debts which are susceptible
of compensation, the rules on application of payments shall apply to the
order of the compensation.
3. May there be
consumable?

compensation although things

The Law on Obligations and Contracts 2003 Ed. Hector S. De Leon

due are not

Ans.
No because it defies the requisites of legal compensation.

Compensation

4. When may compensation take place when only one of the debts
is due?
Ans.
When the debts are already due.
III.

Answers to problems
1. Compensation shall not be proper when one of the debts arises from a
depositum or from the obligations of a depositary or of a bailee in a
commodatum.
2. The parties may agree upon the compensation of debts which are not yet
due.
3. Compensation shall not be proper when one of the debts arises from a
depositum or from the obligations of a depositary or of a bailee in a
commodatum. Neither can compensation be set up against a creditor
who has a gratuitous title, without prejudice to the provisions of art 301.

Why? A deposit is made or a commodatum is given on the basis of

confidence of the owner. It is therefore, just that the depositary or
borrower should in fact perform his obligation; otherwise the trust
of the depositor or lender would be violated.

4. When one or both debts are rescissible or voidable, they may be

compensated against each other before they are judicially rescinded or

avoided.

The Law on Obligations and Contracts 2003 Ed. Hector S. De Leon