FundamentalsofCompensationintheExtinguishmentofanObligation

(SCRA98)

ConceptofCompensation

Compensationtakesplacewhentwopersons,intheirownright,arecreditors
anddebtorsofeachother.Iftheyarenotmutuallycreditorsanddebtorsof
eachother,thelawoncompensationisnotapplicable.

It must benotedthat compensationtakes placebyoperationof lawand

extinguishesreciprocallythetwodebtsassoonastheyexistsimultaneously
totheamountoftheirrespectivesums.Inotherwords,whentwoormore
personsareindebtedtoeachothersimultaneously,forclearandliquidated
debts,compensationtakesplacefromthemomentthetwodebtscoexistand
theyextinguisheachotherbythemereoperationoflawtotheextentoftheir
respectivesums,withouttheactofeitherparty,oreventheirknowledge,at
the time of coexistence of such cross debt. Where ones claim against
another is still the subject of court litigation, compensation cannot be
invokedbecauseitisarequirementforcompensationtotakeplacethatthe
amountinvolvedbecertainandliquidated.

TypesofCompensation

A. LegalCompensation

LegalCompensationisthattypewhichexistsbyoperationoflaw.Whenit
takeseffect,legalcompensationextinguishesbothdebtstotheconcurrent
amount,eventhoughthedebtsmaybepayableatdifferentplaces.Incase
thedebtsarepayableatdifferentplaces,thereshallbeanindemnityfor
expensesofexchangeortransportationtotheplaceofpayment.

Therequisitesforlegalcompensationtotakeplace:
Eachoneoftheobligorsboundprincipallyandatthesametimea
principalcreditoroftheother;
 Both debts consist in a sum of money, or if the things due are
consumable,theybeofthesamekindandqualityifthelatterhadbeen
stated;
Thetwodebtsaredue,liquidatedanddemandable;
And that over neither of them would there be any retention or
controversy,commencedbythirdpersonsandcommunicatedindue
timetothedebtor.

Whenalltherequisitesarepresent,compensationtakesplaceautomatically
oripsojureandextinguishesbothdebtstotheconcurrentamount.However,
if after compensation has taken place on of the extinguished debts is
assignedtoastrangerwiththeconsentofthedebtor,thedebtorcannotsetup
againsttheassigneethecompensationwhichwouldpertaintohimagainst
theassigner,unlesstheassigno